While a record number of institutional investors are incorporating ESG factors into their investment decision-making, there apparently still are a number of ongoing disparities, according to a new survey.
The results of Callan’s ninth annual ESG Survey reveal that a record 49% of institutional investors incorporated environmental, social and governance (ESG) factors into investment decisions, which represents a 123% increase since the survey’s inception in 2013.
In addition, 40% of respondents not yet incorporating ESG factors into investment decisions are considering it, which is the highest rate in the survey’s history. This figure had fluctuated in the 10%-20% range prior to 2020, suggesting that interest in ESG incorporation is rising significantly. The survey also found that 55% of those incorporating ESG did so in the past five years.
“We’re seeing the highest rate of ESG incorporation in the nine-year history of the survey, plus another 40% of investors considering it,” observes Tom Shingler, Senior Vice President and leader of Callan’s ESG team. “This shows a strong secular trend toward ESG incorporation in the face of regulatory headwinds under the prior presidential administration. With the proposed ESG and proxy voting rule from the U.S. Department of Labor, the pace of adoption could accelerate from here.”
Ongoing Disparities
For those incorporating ESG, the most frequently cited reasons among respondents for doing so were to align the portfolio with the organization’s values (55%) and to meet fiduciary responsibilities (54%). Aligning with their organization’s values was a particularly relevant reason for foundations (90%) and public funds (75%).
For those not incorporating ESG, the most frequently stated responses were that they are considering it or that its value was unproven. According to the findings, 40% of investors that were not incorporating ESG were considering it and had not decided. Roughly 38% of investors indicated they did not incorporate ESG because the benefits to their plan were unproven or unclear.
Similarly, 31% of respondents said they were not convinced that ESG contributes to performance. Moreover, lack of regulatory clarity was cited by 29% of those not incorporating ESG. Callan notes that its interaction with clients, particularly with ERISA plans, is consistent with this finding.
In the overall fiduciary decision-making process, the most common forms of ESG incorporation were pursuing education, indicative of the rising interest in the topic, and incorporating language in the IPS.
In the manager selection process, more than 60% of investors that integrated ESG considered those factors in every investment manager selection they made, and also communicated to investment managers the importance of ESG to their organization. Callan notes that investment managers are being asked increasingly to address their approach to ESG in client and prospect meetings, regardless of whether it’s a dedicated ESG mandate.
Adoption by Type
Regarding the ongoing disparities, the results show that 63% of public plans, 57% of foundations and 50% of endowments incorporated ESG factors into their investment decisions, while only 20% of corporate plans did the same. Callan suggests that this low level of adoption for corporate plans reflects a lack of regulatory clarity, as the Trump and Biden administrations adopted contrasting positions on the topic of ESG.
Despite the growth in interest in ESG within the institutional investing community, data from the Callan DC Index further shows that adoption of dedicated ESG options among DC plans is still relatively low. The firm suggests that this lack of dedicated ESG fund adoption “masks” the growing interest in assessing all DC plan managers’ ESG integration.
According to Callan’s DC Index, about 13% of DC plans offered a dedicated ESG option. But this topline number overshadows a large divide among plan types: only 5% of corporate DC plans offered a standalone option, compared with 43% of public and nonprofit plans.
What’s more, utilization for all plan sponsor types remained low—allocations ranged from 0.2% to 3.1% of total plan assets, with an average allocation of 1.2%. Callan notes that these utilization and prevalence numbers are on par with the figures for emerging market equity, REITs and global/global ex-U.S. fixed income.
Meanwhile, according to Callan’s DC Trends Survey, there has been a slow but steady increase in the percentage of plan sponsors that added an ESG option to the investment menu in the previous year—up from 1.5% in the 2018 survey to 5.3% in the 2020 edition.
The survey was conducted from May to June 2021, and reflects input from 114 U.S. institutional investors with assets under management ranging from small (under $500 million) to large (more than $20 billion). Note, however, that while respondents included both public and corporate DB and DC plans, as well as from endowments and foundations, the sample size for corporate plans was 22%, with only 5% of that representing corporate DC plans. The largest share of respondents was from endowments and foundations (38%), followed by the government sector (35%).
