Larger Plans Continue to Outpace Smaller Plans in Incorporating ESG Factors

While adoption rates of environmental, social and governance (ESG) factors among institutional investors have leveled off, larger funds have consistently had the highest rate of incorporation, new research shows.

In Callan’s 2017 ESG Survey, the firm found that fund sponsors incorporating ESG factors into their investment decision-making process remained at 37%, unchanged from 2016. And further suggesting a plateau in adoption rates, the findings show that only 7% of respondent firms that have not yet incorporated ESG factors were considering doing so, down from 22% in 2016.

While the top-line percentage was unchanged, plans with more than $20 billion in assets increased incorporation of ESG factors by 136% from 2013 to 2017, according to the findings. The authors note that these plans now have the highest rate of incorporation at 78%, compared to only 30% for the smallest funds. ESG adoption across all plan sizes has increased 68% since the firm’s first such survey in 2013.

Among the top reasons cited for incorporating ESG factors in the 2017 survey were:

  • “My fund must consider ESG factors as part of our fiduciary responsibility,” at 47%.
  • “The fund’s investment policy statement dictates that we consider ESG factors,” at 42%.
  • “We expect to achieve higher returns and we expect to achieve an improved risk profile,” at 32%.

The authors explain that explicitly documenting ESG factors by way of the investment policy statement (IPS) was a common implementation approach among all fund types except corporate funds. They observe that, “Ironically, only 13% of corporate funds’ IPS dictated that ESG factors should be considered even though 88% of corporate respondents indicated they must consider ESG factors as part of their fiduciary responsibility.”

The most common reason cited in 2017 for not incorporating ESG factors was that the fund would not consider any factors that are “not purely financial” in the investment decision-making process (41%). The next highest reason was that the value proposition remains unclear (39%), which was down from 63% in 2016.

Below are the top-line findings from Callan’s 2017 survey.

1. Funds that have incorporated ESG factors into investment decisions:

  • 2013 (22%)
  • 2014 (26%)
  • 2015 (29%)
  • 2016 (37%)
  • 2017 (37%)

2. In 2017, funds that incorporated ESG factors into investment decisions, by organization type:

  • Public (35%)
  • Corporate (25%)
  • Endowments (39%)
  • Foundations (56%)

3. In 2017, funds that incorporated ESG factors into investment decisions, by plan type:

  • Corporate defined benefit plans (25%)
  • Corporate defined contribution plans (18%)

4. In 2017, funds that incorporated ESG factors into investment decisions, by fund size:

  • Under $500 million (30%)
  • $500 million to $3 billion (42%)
  • $3 billion to $20 billion (22%)
  • $20 billion to $400 billion (78%)

The survey, conducted in August 2017, polled 105 institutional investors with $1.1 trillion in total plan assets, with respondents representing approximately one-third public funds, one-third corporate funds and one-third endowments and foundations.

Add Your Comments

One Comment

  1. url url'>Nick Kralj
    Posted January 17, 2018 at 12:18 pm | Permalink

    While ESG is less used in the small plan space, we see strong desire for the position.

    The challenge is the specificity of the ESG criteria desired and the mechanism to create that vehicle does not translate to the small market as well. This is much easier for larger plans to accomplish this with custom separate accounts and investment management, rather than select from the (today) narrow set of mutual fund offerings available, which may or may not meet the desired ESG outcomes of the plan at the right price.

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