Although the challenges of data, regulation, disclosures and performance remain obstacles in the sustainable sphere, they are less pronounced than two years ago, according to Capital Group’s latest ESG Global Study.
Although the challenges of data, regulation, disclosures and performance remain obstacles in the sustainable sphere, they are less pronounced than two years ago, according to Capital Group’s latest ESG Global Study.The study, which canvassed 1,130 professional investors in 25 countries, explores the attitudes towards and adoption of environment, social and governance (ESG) investment.
The quality of ESG data remains the most significant concern, with 54% stating that consistency and reliability is still a ‘very challenging’ issue for their ESG adoption. However, this was down from 62% two years ago.
Less than half or 46% are worried about how ESG could impact investment performance, compared to 54% in 2021.
The number of investors which describe the complex regulatory landscape as very difficult is slowly decreasing, from 50% two years ago to 47% today.
With a lack of industry-wide definitions of ESG, 39% of institutional investors have formed their own definitions to ensure consistency across teams.
Moreover, over a third have created their own in-house approach to categorising ESG funds.
“It is encouraging to see signs that some longstanding barriers to ESG adoption, like data and definitions, are starting to diminish as the more investors know about ESG, the more they are finding proactive ways of dealing with its challenges,” said Jessica Ground, global head of ESG at Capital Group.
While these hurdles have become easier to overcome, concerns surrounding greenwashing have grown.
Nearly 60% see it as a grave challenge today, a much higher proportion than the 39% that voiced their concern in 2021.
The report cited a quote from a chief investment officer (CIO) of an Italian independent advisory firm who said, “The greenwashing issue is bad. But in my opinion, greenwashing is an issue at the investee company level rather than the asset manager level. A lot of
companies only present positive numbers.”
However, as the report notes, the rise in greenwashing concerns does not necessarily mean the problem is getting worse. It may be indicative of wider media reporting and heightened regulatory actionon greenwashing, rather than increased dysfunction.
The report said there are a number of factors shaping perceptions of greenwashing. These range from press coverage of high-profile cases of alleged greenwashing to anti-ESG commentary and the reclassification and downgrading of ESG funds.
Another issue highlighted by respondents was the lack of UK Sustainable Development Goals (SDG) aligned funds to invest in.
Nearly half or 45% said this was especially the case with fixed income funds, while 41% said it was true for multi-asset funds, and 35% for equity funds.
A lack of standardisation for integrating ESG risks into credit ratings was also the top reason given for not integrating ESG into fixed income.
Forty six percent said it was the main barrier, while 33% cited the lack of data in fixed income sub-sectors.
In terms of regions, EMEA is still at the forefront with the share of “conviction” investors rising to 33% versus 31% in 2022 while Asia Pacific registered a 25% jump compared to 22%.
By contrast, the US is heading in the opposite direction with adoption dropping from 74% in 2022 to 69% this year although in Canada, adoption is at a high 88%.
The report said the US numbers are not surprising given that in the past year, some states have passed laws and implemented rules designed to curtail ESG.
The result is that more US respondents say the increased scrutiny has changed their
approach to ESG while investors are monitoring the situation to see how it evolves.
In March 2023, Florida formed an alliance with 18 other US states -Alabama, Alaska, Arkansas, Georgia, Idaho, Iowa, Mississippi, Missouri, Montana, Nebraska, New Hampshire, North Dakota, Oklahoma, South Dakota, Tennessee, Utah, West Virginia, Virginia and Wyoming – to pushback against the The Department of Labor’s new rule allowing climate-aligned funds in 401(k) retirement plans.
In terms of investments, equities remained the most popular asset class for implementing ESG, ahead of fixed income, 58%, alternatives, 44%, emerging markets, 31% and real estate, 30%
“We see investors globally continue to favour an active approach with fundamental research, as this helps identify companies with credible transition plans that will be critical for further ESG adoption,” said Ground.
As for approach, 74% of investors preferred active funds to integrate ESG, compared to 18% who favoured passive funds and 8% who opted for hybrid instruments.
Active’s popularity was because it offered a more effective stewardship and engagement as well as a forward-looking view of company ESG profiles.
Looking ahead, 32% of investors are planning to increase their allocations to ESG bond funds as inflation eases, including 37% of institutional investors.
Forty per cent suggested that multi-thematic ESG funds are an effective means of diversifying risks related to their style biases and 35% plan to increase allocations to more style-neutral ESG equity strategy over the next 12 months.
Meanwhile, 59% believed that strategies which focus on top companies in sustainable sectors with high ESG ratings at the expense of companies seeking to transition to a sustainable future will miss out on potential investment opportunities.
© Markets Media Europe 2023
