ESG is moving into the mainstream but challenges persist

From

Rakhi Kumar

State Street Global Advisors, the asset management business of State Street Corporation (NYSE: STT) has published major new research outlining the key push and pull factors for environmental, social and governance (ESG) principles adoption across 300 institutional investors globally[1] .

Top push factors – drivers of ESG adoption – include a need to meet fiduciary duty and regulations, followed by ESG risks management for the portfolio. Top pull factors – inhibitors of ESG adoption – include a lack of reliable and consistent ESG data, followed by resourcing or cost issues associated with internal integration, infrastructure, knowledge building and a lack of available ESG talent to manage integration.

Top factors pushing ESG adoption: fiduciary duty, regulation and risk mitigation

The research reveals that key drivers or ‘push’ factors for financial institutions are jointly fiduciary duty and a growing regulatory environment; each cited as top push factors by 46 percent of respondents.

“That fiduciary duty was cited so highly marks a significant development since many investors previously struggled with whether ESG adoption runs contrary to their fiduciary objectives,” said Rakhi Kumar, Head of ESG Investments and Asset Stewardship at State Street Global Advisors. “Alongside regulation, this is now a major driver of ESG implementation.”

For respondents who noted fiduciary duty as their primary consideration, their next and highest ranked drivers – both at 40 percent – were requirements for ethical and social responsibility on behalf of their clients and a desire to mitigate ESG-related risks.

Regional differences exist in the key drivers pushing ESG adoption. At 59 percent, the importance of fiduciary duty was more pronounced in North America compared to EMEA and Asia-Pacific while the region’s next greatest concern, at 48 percent, was keeping up with the market’s standard-setters.

Within EMEA, regulatory shifts were the clear top ‘push’ factor closely followed by a desire to mitigate against ESG and reputational risks at 52 percent, 45 percent and 39 percent respectively.

Meanwhile, primary drivers for Asia-Pacific investors include mitigation of ESG risks at 47 percent, fiduciary risk at 38 percent and pressure from beneficiaries at 37 percent.

“The research results confirm what we’re hearing from our clients,” commented Ben Colton, APAC Head of Asset Stewardship at State Street Global Advisors. “The regulatory environment is clearly driving institutional investors towards a sea-change in ESG practices. Over the past year most of our clients have explored what they can do about their portfolios’ carbon profiles and climate-related risks.”

Across all regions, outperformance is considered a less significant ESG adoption driver than risk mitigation.

Top ESG pull factors: the data challenge, resources and expertise

Several significant ‘pull’ factors continue to hold ESG adoption back. The chief deterrent cited was the unreliability and inconsistency of ESG data, with 44 percent highlighting these data challenges as a primary concern.

Weightings ascribed to each ‘pull’ factor vary according to the type of institution in question. Pension funds are most likely to cite an availability of reliable ESG data as their top concern (47 percent).

However, a large proportion of sovereign wealth funds (69 percent) view internal resource costs as a deterrent, which indicates partnership opportunities between sovereign wealth funds and asset managers to collaborate on ESG planning.

The top three push factors were highly clustered with the second factor, internal resource constraints and costs at 43 percent. This was closely followed at 40 percent by a lack of expertise as one of the most significant limiting factors to implementing ESG.

Given the growing prominence of ESG as a materially significant portfolio consideration, an unsurprising 95 percent of respondents signaled their intention to hire more ESG specialists in the next three years. The remaining 5 percent intend to encourage their staff to become more familiar with the concept.

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[1] State Street Global Advisors Research Report: Into the Mainstream – ESG at the Tipping Point (November 2019)

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