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.
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
Respondents integrating ESG factors into at least
What will drive ESG integration further in the next 12 months?
What will drive ESG integration further in the next 12 months?
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
Opportunities are arising from ESG integration
Top five ESG investment themes
Top five ESG investment themes
Respondents rating each ESG element as “very important” or “important”
Respondents rating each ESG element as “very important” or “important”
More transparency around ESG is needed to build trust and accountability
Top five guidelines for measuring impact and non-financial reporting
Top five guidelines for measuring impact and non-financial reporting
ESG integration across asset classes
Respondents integrating ESG into different asset classes
Respondents integrating ESG into different asset classes
Top three ESG-integrated asset classes
Top three ESG-integrated asset classes
Will ESG integration across portfolios be the ‘new normal’?
76%
76%
of investors agree that the pandemic will accelerate inflows into sustainable investments
of investors agree that the pandemic will accelerate inflows into sustainable investments
74%
74%
of investors agree that the SDGs are their main guiding framework when it comes to impact investing
of investors agree that the SDGs are their main guiding framework when it comes to impact investing
Key findings
- 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
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
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
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
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
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?
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.
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