Largest asset owners lag on ESG

Only a quarter have integrated ESG scoring into manager selection processes, finds survey of European and US asset owners

A new survey has found limited ESG practices within asset owners’ portfolios in the US and Europe, as only a quarter reported integrating ESG scoring into their investment manager selection processes.

Fintech GaiaLens commissioned US-based market research agency to survey 200 of the largest asset owners – the respondents were an equal split of 100 based in the US and 100 in Western Europe including UK.

Although 60% of all asset owners said they are already building dedicated ESG portfolios and more than half (55%) are currently offering ESG fund options, only 25% have integrated ESG scoring into their existing investment manager selection processes and only 29% have made requests for all their existing investment managers to present their ESG strategies and plans to them.

Screening

Only 13% of asset owners both sides of the Atlantic have applied negative screening of certain types of investments or sectors – nearly three-quarters (73%) were screening out tobacco companies and 69% weapons/defence equipment suppliers – but encouragingly just over 18% have already divested from certain sectors that they no longer wish to be associated with.

One in six asset owners are applying positive screening techniques as part of their ESG realignment work, which has resulted in a healthcare sector investments being popular in portfolios. Some 72% are screening in stocks which are ‘good for the environment’, according to the survey. However, screening perceptions differ in the two regions with 88% of European asset owners favoured environmentally-sound stocks, but just half of US-based asset allocators favoured green investments.

Data quality

Asset owner CIOs that took part in the survey said data gaps in companies social and environmental performance records remains their top concern. Some 40% registered this concern in European and 32% in the US.

Other top CIO concerns were their inability ‘to probe causal relationship between ESG performance and financial performance’ raised by 40% of 100 US-based CIOs and senior decision-makers questioned, and over a quarter of all CIOs said a ‘lack of standardisation for weighting and measuring ESG performance’.

Nearly a quarter of asset owners also cited ‘accuracy of existing ESG scoring and rating systems’ to be a top three concern, with again this being slightly more significant in Europe than in the US.

See also: – UK asset owners lag fund managers on ESG factors

Similarly, 59% of CIOs said they needed ‘to be able to screen and monitor portfolios of investments and flag companies with high ESG risk exposure’ when asked about their top priorities in what they wanted to obtain from asset owners.

Gordon Tveito-Duncan, co-founder and head of ESG technology at GaiaLens, commented: “Many of the findings from our comprehensive study of CIOs in the largest asset owners across public, corporate, pensions, sovereign wealth fund, endowment and foundation investing based in Western Europe and the US, confirm our anecdotal findings that asset owners are struggling to build the systems to support the massive task of realigning their portfolios to reflect the rapid transition to ESG-friendly investments.

“The speed of this transition has meant that the application of robust systems, processes, due diligence, as well as the application of ESG rating and scoring, and gathering of sufficient data to feed these systems is patchy at best, and wholly lacking in some areas.

“To put it simply, the application of ESG-linked data gathering, scoring and analysis systems by asset owners is playing catch-up. There’s widespread evidence of data gaps and scoring inconsistencies. We fully intend to revisit progress in these areas in a year’s time to see how much has changed.”

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Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity and has been an investment journalist for 16 years. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021, and was Winner...