Institutional investors require more robust environmental, social and governance (ESG) data disclosure and standardisation to better support wider ESG adoption, according to a new global study.
The NMG ESG Study, conducted by NMG Consultants and sponsored by Franklin Templeton, found that improved transparency and data standardisation are viewed as “key catalysts” for further and deeper adoption of ESG among institutional and wholesale asset owners in North America, Europe and APAC.
The research, which included 237 interviews with senior individuals at institutional and wholesale investment companies in 21 markets, representing $20tn in assets, revealed that 39 per cent of global institutional investors identify a lackof acceptable policy frameworks as the main challenge to introducing ESG.
Meanwhile, 36 per cent of respondents cited a lack of quality data to support decisions.
The study found that 80 per cent of global asset owners were investing to increase their ESG knowledge and 73 per cent were expanding their capabilities in this area, ahead of other categories such as investment strategy, with 57 per cent seeking to develop their knowledge in this area and 50 per cent in developing their capability, and technology at 59 per cent and 48 per cent respectively.
Julie Moret, head of ESG at Franklin Templeton, said: “The study underscores the recognition that robust, measurable and comparable data disclosures and common standards are pivotal to support the deeper application of ESG.”
Moret added: “Encouragingly, the research evidences the extension of ESG principles into alternatives such as private equity and infrastructure, which we believe is a positive development given the potential for underexplored growth opportunities.”
The study revealed that in real assets, 79 per cent of sophisticated institutional investors are currently incorporating ESG into infrastructure investments, and 78 per cent adopt an ESG approach in private equity.
Among the range of benefits identified by institutional investors when integrating ESG into investment decisions, reducing risk is cited by 69 per cent of institutional investors as the main benefit of incorporating ESG, followed by improving financial returns at 60 per cent.
But 30 per cent of respondents said they believe that ESG integration may negatively affect the profitability of portfolios and deliver lower returns.
Asset owners in Europe and North America expressed a desire to consider social issues as, overall, these issues are considered less often than environmental or governance issues. Less than 14 per cent of North American investors consider any social factors aside from diversity (28 per cent).