An annual survey on environmental, social and governance (ESG) factors reveals that adoption and implementation among institutional investors are the highest in the survey’s history, but the take up rate among DC plans still lags.
Callan’s 6th annual ESG Survey finds that incorporation of ESG factors into the investment decision-making process nearly doubled — from 22% to 43% — between 2013 and 2018. In addition, another 8% of respondents indicated they are considering implementing ESG in the U.S., bringing the level to about half of U.S. asset owners that are implementing ESG or are considering doing so.
Ongoing Disparity
Overall, the survey reveals ongoing disparity in ESG adoption rates by fund type and size. Conducted in May 2018, the survey features the responses of 89 unique U.S. institutional funds. Foundations reported the highest rate of incorporation, at 64% (up from 35% in 2013), while endowments incorporated ESG factors at a rate of 56% — more than double the rate in 2013 (22%).
Corporate funds, however, saw a decrease in ESG adoption year over year, from 25% in 2017 to 20% in 2018. The level is still up from 14% in 2013, however. Not surprisingly, there was a significant difference in ESG adoption rates between DB and DC plans — corporate DB plans incorporated ESG factors into the investment decision-making process at more than three times the rate (33%) of their DC counterparts (9%).
Moreover, only 13% of all DC plans (both public and corporate, and incorporating ESG factors or not) include an ESG option in their fund lineup, compared to a 40% incorporation rate for DB plans. Similarly, the study notes that 16% of DC plans in the Callan DC Index offer a dedicated ESG option.
When there is an ESG-focused option in the fund lineup, usage tends to be very low, Callan notes. Respondents indicate an average allocation of just 1% to the ESG option, when available.
Implementation Approaches
Among those who are pursuing ESG, implementation approaches reflect a new phase of incorporation, according to Callan. Previously, investors focused more on pursuing education and adding ESG language to investment policy statements. When the firm inquired about ESG implementation approaches in 2016 and 2017, “added language to the investment policy statement” was the most popular method among survey respondents.
In 2018, the two most popular approaches suggest funds are now taking action on ESG beliefs:
- Considered ESG factors with every investment/investment management selection (55%)
- Communicated to investment managers that ESG is important to the fund (55%)
- Engaged with management, actively voted proxies and/or submitted shareholder resolutions (50%)
- Added language to investment policy statement (45%)
- Hired a manager/strategy that incorporates ESG (37%)
- Incorporated a screening process (37%)
“The latest survey reinforces the notion that ESG is not a one-size-fits-all solution. Rather, investors are finding implementation approaches that match their funds’ goals,” explains Anna West, senior vice president and co-manager of Callan’s Published Research Group. “The shift in implementation strategies — from introducing language to identify ESG goals and beliefs, to working with investment managers to implement those concepts — suggests we’re moving into a new phase with ESG in the U.S.”
Healthy Skepticism
Meanwhile, 54% of the respondents said they have not incorporated ESG factors into their investment decision-making, down from 78% in 2013. The most common reason cited for not incorporating ESG was that the fund would not consider factors that are not purely financial in the investment decision-making process (52%).
Callan notes that this has been one of the top three reasons against incorporating ESG since the start of the survey. “Nearly half of respondents that are not incorporating ESG cite a dearth of research tying ESG to outperformance. This reason resonated in particular with corporate defined benefit plans (83%) that do not incorporate ESG factors into investment decision-making,” the firm noted.
Skepticism over incorporating ESG factors seems prevalent, as a recent report from Cerulli cited similar findings.
Moreover, in the wake of a Field Assistance Bulletin issued in April by the Labor Department that backed off previously issued guidance, a GAO report issued this summer called for additional clarification to assist fiduciaries in investment management involving ESG factors.
