Investors Leaning Towards ESG, but Finding Frameworks Lacking

SYDNEY, Australia – Institutional investors are leaning towards starting to integrate ESG (environmental, social, and governance) factors in their asset portfolios.

More and more institutional investors want to revolutionize their portfolios by integrating ESG factors, however, they are facing primary roadblocks in the process. Investors find that there is lacking, especially in terms of acceptable policy frameworks and other supporting data. The sentiment is based on a new survey, which was done by NMG Consulting with Franklin Templeton Investments sponsoring it.

The survey was conducted from April to June 2019 and participated by 257 institutional investors. The number of survey participants was split into those that have low, medium, and high levels of sophistication.

From the survey, there are 55 institutional investors with high level of sophistication that has already identified clearly the set of beliefs that are reflected in their ESG policies; 103 investors with a medium level of sophistication have started adopting ESG principles in more than one of their asset classes, and 29 institutional investors with a low level of sophistication have adopted early in terms of building and designing their ESG considerations. The other 50 investors in the survey have yet to make a move in implementing any ESG principle in their assets.

Based on the result of the survey, experienced and more advanced institutional investors tend to take more responsible approaching when investing, and the more they tend to lean towards integrating ESG principles into their investing approaches.

Investors with a high level of sophistication incorporate ESG variables into the majority of their assets, with a rate of around 91% of their asset portfolio. Investors with low to medium levels of sophistication, on the other hand, take ESG approaches around 41% and 69% of their equity portfolios, respectively.

In the survey, institutional investors were also asked about the major hurdles they face when trying to expand their ESG principles, and only 115 out of 257 answered. Around 39% of the 115 respondents who answered the question stated that the primary roadblock in integrating ESG policies is the lack of an acceptable framework for the policy; 36% cited that the deficiency in quality supporting data for ESG related decisions is the key hurdle.

Other ESG integration roadblocks cited by institutional investors during the survey include a constricted scope of ESG asset management products, no alignment in the fund objectives that involve returns and risks, no knowledge of ways to integrate ESG principles, and the lack of regulatory support and focus.

Overall, environmental and governance issues are considered more often than social issues in terms of integrating ESG factors. Around 78% of the respondents said climate change is an ESG factor.