Most institutions around the world are moving to integrate ESG metrics into their processes and portfolios, but at different speeds
US investors continue to diverge from those in Europe, Asia and even Canada when it comes to environmental, social and governance (ESG) investing, says the 2023 Trends in ESG Investing study by Coalition Greenwich.
Until recently, institutional investors around the world seemed broadly in agreement about ESG. Although they adopted ESG at different paces, most institutions in North America, Europe, and Asia appeared to be moving to integrate ESG metrics into their investment processes and portfolios.
“While the process of ESG adoption continues in Europe and Asia, institutional investors in the US are at an inflection point,” says Mark Buckley, global head of investment management at Coalition Greenwich.
North America lags behind global ESG adoption
In Europe, 94 percent of the institutional investors participating in a recent study by Coalition Greenwich have adopted ESG in some capacity. In Asia, that share stands at 86 percent and in North America, 38 percent of institutions are using ESG. Adoption is at a crossroad in the US with uncertainty on the path forward as only 32 percent of US asset owners are employing ESG.
“While the employment of ESG in portfolios continues apace in Europe and Asia, asset owners in North America are pulling back amid political tensions,” says Sophie Emler, senior relationship manager at Coalition Greenwich, and co-author of the report, The ESG Spectrum: Investor Expectations and Preferences Across the Globe. “Asset managers that operate in this space face a wide spectrum of client needs.” She adds that thematic priorities further highlight regional differences in investor ESG preferences. In the US, there was a notable emphasis on DE&I themes – “a focus that was not mirrored by European or Asian investors, who instead demonstrated a robust thematic commitment to Net Zero.”
In continental Europe, the UK, Japan, and Canada, a solid majority of institutional investors now require all managers competing for mandates to provide an ESG policy statement and documentation. In Asia excluding Japan, 85 percent of institutions have imposed such requirements. In the US, only a third of institutions require managers to have a documented ESG policy. The research shows similar differences between institutions in the US and investors in other regions when it comes to expected ESG expertise from investment consultants, the use of ESG-specific benchmarks to assess manager investment performance, and other areas.
“At the root of the growing divergence between the U.S. and the rest of the world are differing perspectives on the role and definition of fiduciary responsibility,” says Buckley. “In addition, both asset owners and investment managers in the US could be slowing their adoption of ESG in the face of delayed ESG rulemaking by the SEC and a muddled ESG legislative environment.”
However, even with a lower proportion compared to global averages, the sheer size of the institutional market in the US ensures its continuing influence on the development of ESG investing globally, and the need for managers with ESG expertise.
Seeking Stewardship
Around the world, institutions who have adopted ESG are leaving behind early tactics based on screening out investments that fall short of ESG criteria in favour of more sophisticated approaches based on ‘stewardship.’ Under a stewardship model, investors take an active stance, engaging directly with companies in their portfolios to agitate for positive change. Increasingly, institutional investors are looking for asset managers with well-developed strategies and proven track records in stewardship.
Institutions are asking their asset managers for proof of both their commitment to and effectiveness in stewardship. This can include annual stewardship reports, case studies, and proxy voting records. In response, many asset managers are deepening their stewardship resources and expanding their intellectual capital in the space.
