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Political Pressure Aside, Asset Managers Stand Pat on ESG Integration

ESG Investing

Regardless of the divided political pressure surrounding environmental, social, and governance (ESG) investing, asset managers apparently remain committed to considering such factors, with climate change remaining a top priority for firms, a new report suggests. 

According to The Cerulli Report—U.S. Environmental, Social, and Governance Investing 2022: Social Issues Come to the Forefront, 96% of asset managers have or plan to have (2%) an ESG integration approach and are using material ESG information when evaluating underlying investment portfolio companies to identify risks and opportunities. 

This finding comes even as the U.S. political environment has become increasingly polarized, with disparate views on environmental and social-related issues, Cerulli notes.

“On one hand, institutional investors and asset managers often feel the heat from moving too slowly on divesting fossil fuel assets, coupled with pressure from radical divestment campaigns,” explains Michele Giuditta, director at Cerulli. “On the other hand, pension plans and asset managers, addressing the risk of climate change, could fear penalization by states and politicians who view ESG practices as ideologically driven.”

Yet, the responsibility of navigating the complexities of these demands falls on asset managers and plan fiduciaries, as these asks do not typically consider the challenges of managing the assets, the report further observes.  

Three-quarters (75%) of asset managers say clients believing that ESG investing is driven by political views is at least a “moderate challenge” to increasing client receptivity of ESG issues—this level is up from 49% in 2021. Similarly, 60% of asset owners and 72% of advisors believe that divided politics are having at least a moderate impact on clients’ perception of ESG investing.

At the same time, the political polarization is also impacting distribution, with 46% of financial advisors citing the perception that ESG investing is politically motivated as a “significant deterrent” to ESG adoption, compared to just 16% in 2021, the report notes.

Cerulli believes, however, that the political headwinds faced in 2022 will not stop asset growth, and demand and product innovation will continue to rise. Moreover, these recent pressures faced by investors apparently have not impacted asset managers’ investing plans, with climate change remaining a top strategic focus. According to the firm’s research, 83% of managers are making climate-related factors a top priority for new product development; this also includes ESG integration (93%) and active ownership activities (94%).

Climate change and other environmental issues are also top themes asset owners are seeking to address when allocating to investment strategies. Here, the firm’s research shows that climate change/carbon reduction (71%), environmental sector (65%), and sustainable natural resources/agriculture (55%) are top areas of focus.

Meanwhile, to alleviate near-term skepticism from investors caused by recent political backlash, Cerulli believes that asset managers need to discuss the merits of ESG and sustainable investing with their clients and reinforce how and why they are using relevant ESG data to drive long-term economic value. Transparency and reporting that validates how ESG information is additive will also be key, the firm notes.

“Educating clients on how ignoring ESG risks, such as climate risk, is likely to harm long-term returns will help show clients that ESG is not about politics, it’s about managing investment risks and returns,” Giuditta further emphasizes.

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