Resetting the agenda

We sponsored The Economist Intelligence Unit to survey 450 investors and gather insights on how the ongoing shift of ESG from risk to opportunity is shaping the future.

10 May 2021

Executive summary

To better understand how Environmental, Social and Governance (ESG) factors could be a new performance marker and a growth driver in this environment, The Economist Intelligence Unit (EIU), sponsored by UBS, conducted a survey of institutional investors globally.

The survey provides a detailed look at global trends in sustainability, and highlighted that the need to integrate ESG factors when investing has become even more critical. 

Employing ESG is not just to mitigate risks and identify opportunities but allows investors to engage with companies and bring about the positive change needed to drive a sustainable economic recovery post the pandemic.

Integration of ESG is growing steadily

Respondents integrating ESG factors into at least

What will drive ESG integration further in the next 12 months?

Survey respondents integrating at least 25% of their AUM. Integration of ESG factors into the investment process is expected to grow in next 12 months.

ESG adoption will be less about mitigating risk and more about the fulfilment of the Sustainable Development Goals (outcome orientated)

ESG investments proved resilient during the COVID-19 crisis

Respondents agreeing that their company’s investments that integrate ESG factors have performed better financially than traditional equivalent investments

Respondents agreeing that their company’s investments that integrate ESG factors have performed better financially than traditional equivalent investments during the pandemic

Opportunities are arising from ESG integration

Top five ESG investment themes

Respondents rating each ESG element as “very important” or “important”

Of the top five investment themes favoured by investors, four are related to the environment.

The pandemic has amplified the spotlight on social and governance factors that will have a key role in building a sustainable world.

More transparency around ESG is needed to build trust and accountability

Top five guidelines for measuring impact and non-financial reporting

Five guidelines for measuring impact and more transparency is needed around ESG to increase transparency.

ESG integration across asset classes

Respondents integrating ESG into different asset classes

Top three ESG-integrated asset classes

Seeing ESG integration across asset classes, including commodities, private debt and alternatives. In North America, the asset class where ESG factors are most considered is real estate, in Europe the same is seen in commodities, and fixed-income is the most ESG-integrated asset class in Asia-Pacific.

Will ESG integration across portfolios be the ‘new normal’?

76%

of investors agree that the pandemic will accelerate inflows into sustainable investments

74%

of investors agree that the SDGs are their main guiding framework when it comes to impact investing

Nearly three quarters of investors agree that the SDGs are the main guiding framework when it comes to defining and measuring the positive impact of their organisations’ investments.

Increased inflows into sustainable investing funds expected to bring opportunities for economies while benefiting societies and the environment.

Key findings

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  • 74% agree their ESG integrated investments had enhanced financial performance versus their traditional investments
  • 76% agree the pandemic accelerated interest in ESG and capital flows into sustainable investments
  • North American investors appear to be ahead of their counterparts in terms of ESG integration, with 41% having at least 50% of their AUM currently integrating ESG criteria, compared with 25% in Asia and 18% in Europe
  • 28% of investors have used ESG factors in the investment process for at least 50% of their AUM in the past three years. Next year 32% will and this rises to 65% who plan on integrating ESG into at least 25% of their AUM in the next 12 months.

Chapter highlights

Snapshots from each chapter.

Chapter 1 - Refer to page 25 in the pdf

Changing perceptions

  • Is ESG a fiduciary duty?
  • Twenty-eight per cent of respondents globally have integrated ESG factors into the investment process for at least 50% of their AUM in the past three years; next year almost a third (32%) will.
  • Environmental factors were cited as “very important” by 54% of respondents.
  • The G in ESG, or the strength of boards and executive management, is also viewed as central. Moreover, governance factors (cited as “very important” by 53% of respondents) have a slight edge on social factors (50%).

Chapter 2 - Refer to page 13 in the pdf

Drivers of ESG

  • Nearly 74% either agree or strongly agree that investments that integrated ESG factors saw better performance than traditional investments in the three years prior to 2020.
  • There is a growing role of fiscal incentives in encouraging private investment in green infrastructure.
  • More than three-quarters of survey respondents agreed that regulation should require asset owners to have at least one trustee or board director with ESG expertise.

Chapter 3 - Refer to page 18 in the pdf

ESG investment themes

  • Renewable energy and energy efficiency, climate change adaptation and mitigation, pollution prevention and control, and sustainable water and wastewater management are the top four investment themes that respondents said they are looking to invest in.
  • Cybersecurity and data privacy rank second on the list, given the potential that threats could lead to heavy financial losses and social instability.
  • Other themes, such as the need for sustainable supply chains, are growing in importance as investors realise their potential impact. The theme of sustainable supply chains encompasses a range of social and environmental issues.

Chapter 4 - Refer to page 25 in the pdf

Integrating ESG and the challenge of transparency

  • The main barriers to integration of ESG include cost; lack of clarity and ESG standards, taxonomy or metrics; and a lack of awareness and understanding of ESG.
  • ESG frameworks are being introduced by asset owners as they work to apply ESG across all asset classes in their portfolios.
  • ESG factors are most often used with listed equities, fixed income, real-estate investment trusts (REITs) and infrastructure.
  • At least 30% of respondents integrate ESG factors in all asset classes, including commodities, private debt and alternatives.

Chapter 5 - Refer to page 33 in the pdf

Leveraging data for impact

  • The large number of frameworks in place makes comparing data challenging; greater convergence is required. The lack of data also impacts greater integration of ESG into the investment process.
  • ESG data, which is by essence more media-driven, has been given a boost by the use of artificial intelligence and big data. Alternative datasets are sources of ESG information that draw from data other than the issuers’ disclosure.
  • Models and methodologies are the critical underpinning of a lot of the ESG data and insights that investors use. Estimation models fill in the data gaps.

Chapter 6 - Refer to page 38 in the pdf

How will ESG shape the investment landscape?

  • Three-quarters of survey respondents agreed that the SDGs are the main guiding framework when it comes to defining and measuring the positive impact of their organisations’ investments.
  • Those in North America (where 80% agreed) have been even more enthusiastic adopters.
  • The COVID-19 pandemic has put a spotlight on social factors, such as labour rights issues, and supply chains.

Why is sustainability high on investors’ minds?Partnering with people and the planet