As sustainability become more mainstream, asset owners are moving to the next level and looking more closely at thematic strategies to enhance impact levels as well as performance, according to a new report – ‘Targeting Impact: Integrated ESG and the Role of Thematic Strategies in Asset-Owner Portfolios‘ by Coalition Greenwich and AGF Investments.
The company, which conducted 151 telephone and online interviews with corporate and public pension funds, endowments and foundations in North America and Europe, showed that overall commitment to sustainability has skyrocketed by 135% over the past five years.
This translated into 72% of asset owners having incorporated some element of sustainability today compared to half in 2016. By 2026, this is expected to increase to nearly 8 in 10 institutions, or 65% actively implementing sustainable investing.
European institutions are leading the charge, with 85% of the region’s pension plans, endowments and foundations now incorporating sustainability, compared with two-thirds of North American asset owners.
Across both regions, corporate pension plans have been fastest to embrace sustainability, followed by endowments and foundations and public pensions.
The research also showed that sustainable thematic strategies have become much more popular with around two-thirds of respondents going in this direction over the past three years with a focus on one or more areas such as climate change, health and well-being, and diversity and inclusion. However, the environment is still way out in front on the thematic chart although as the study points out, asset owners still have significant ground to cover when it comes to aligning their portfolios with their own environmental beliefs and values.
Nearly 90% believe climate change will have a meaningful impact on their portfolios, but fewer than half of institutions are working with asset managers to actively manage climate risks. As the representative of a European corporate pension fund says, “We believe climate change is an issue, but we do not have the necessary data to determine what elements will have the greatest impact on our portfolio yet.”
This underscores the fact that although wanting to make a difference is an important driver, generating returns, either matching or outperforming benchmarks, was front and centre for asset owners. Other benefits listed include portfolio diversification or enhanced risk management through the reduction of ESG-related risks.
“Institutions are increasing allocations to sustainable thematic investment strategies because many asset owners believe they can generate greater impact than ESG integration approaches while acting as a source of alpha by identifying investment trends earlier than other approaches,” said Davis Walmsley, head of client relationships at Coalition Greenwich and author of the report.
The challenges have been well documented. Benchmarking performance for example is not always straightforward with almost 45% employing a broad equity market benchmark, while about 30% use ESG or specialty benchmarks.
Things are also less clear-cut for impact investing. Most institutions rely on reports from their asset managers, including some asset owners who provide specific guidelines on how to report impact. Others though may turn to ratings and assessments from investment consultants and other third-party providers or adopt a DIY approach, quantifying the impact on their own.
Regardless of the direction taken, all agree that the lack of reliable third-party data is one of the biggest hurdles to assessing the impact of sustainable investing. In other words, as the report says, “ESG data is still seen as very much a work in progress.”
Ratings and results differ significantly from provider to provider, based on the goals of their reviews and the methodologies they employ. The inconsistency not only complicates allocation process but also the measurement of the impact of those investments.
In many ways it is down to the asset manager selected which comes with its own set of issues. Asset owners want to ensure that the product delivers what is on the proverbial time., While greenwashing is not a new problem, it is in much sharper focus as sustainability investing has become more mainstream. This is why respondents in the study are digging much deeper into the investment processes and looking for specific attributes.
They start with an assessment of the overall business and a proven commitment to ESG. Many also have a checklist of questions such as whether managers maintain their own internal ESG research capabilities and conduct proprietary ESG analysis? Can they demonstrate a pattern of active ownership through proxy voting as well as engagement activity with management of portfolio companies to advocate for positive change? Affirmative answers suggest that there is a firm and true commitment to maximising impact, as opposed to greenwashing.
In addition, the study found that about two-thirds of asset owners examine managers’ commitment to specific UN Sustainable Development Goals. Around 35% are looking at specific SDGs with 30% seeking funds that align with their own highest-priority SDGs. These range from climate action, affordable and clean energy, high quality education, sustainable cities and communities, responsible production and consumption, and gender equality.
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