A new Cogent Syndicated report from Escalent shows institutional investors are acting with appropriate caution following recent environmental, social, governance (ESG) legislative or coalition measures, yet are continuing to evaluate ESG investment strategies as counterparts to existing portfolio holdings.
The strongest demand for ESG investments is among $1 billion-plus defined contribution (DC) retirement plans (59%) and insurance company general accounts (35%). Millennial and Generation X employees are likely driving demand for DC retirement plans while risk mitigation is influencing insurers.
“Sensitivity to environmental and social factors are fueling demand for ESG in younger cohorts,” said Linda York, senior vice president in the Financial Services research division of Escalent and author of the report. “New to this year’s report, we facilitated in-depth interviews with institutional consultants, outsourced chief investment officer (OCIO) providers and search firms, which revealed a stark shift in the institutional market is coming. OCIO professionals predict when 30-somethings get to be CFOs, we’ll begin to see dramatically more ESG-centric investment strategies than we’re seeing now.”
These are the key findings from Escalent’s 2023 US Institutional Investor Brandscape® report, which examines the behaviors and attitudes of senior investment professionals who oversee defined benefit (DB) pension and DC plans, endowments, foundations, tax-exempt organizations and insurance company general accounts. The report covers trends in asset allocation and investment strategies, the variables that lead to selection, the current state of brand equity, differentiation and loyalty in the market.
Environmental concerns continue to lead institutional investors to adopt ESG investments across all institutional categories, with 70% of respondents indicating interest due to environmental factors. Social aspects, including diversity, human rights and consumer protection, is at near or equal importance as environmental factors for non-profit institutions with 78% indicating environmental adoption reasoning and 75% social reasoning, likely due to social rights closely aligning with their organization’s missions.
“The anti-ESG movement and subsequent backlash are surely curbing some ESG appeal, yet many in the institutional community remain loyal defenders for the investment category,” added York. “Consultants and OCIOs recognize that the recent ESG pushback is more of a reflection of political divide in the US than a sign of substantive decline in interest or adoption. As such, institutional consultants and OCIOs are fully equipped to discuss ESG options with their respective clients and have been actively vetting different asset managers.”
Institutional investors who are not currently using ESG investments and are unlikely to implement them into their strategies in the next year were asked to rank the three reasons they are not interested in ESG investments. Pension investors cite fiduciary concerns due to high fees/expenses (32%) and inconsistent definitions (22%) as leading decision-making factors. Among non-profits, inconsistent definitions are again highlighted as a barrier to ESG adoption (52%), with perceptions of poor investment returns a very close second (49%).
“Despite continuing concerns, the institutional community agrees the environmental aspect of ESG is here to stay,” said York. “Similarly, during our recent interviews we found a striking ethical and cultural alignment. Fueled by the war in Ukraine, there was nearly universal sentiment and virtually no pushback on excluding Russian-based investments. When faced with fundamental human rights, there are ESG facets that most can agree on.”
To learn more about US Institutional Investor Brandscape, visit escalent.co.
Cogent Syndicated conducted an online survey from October 7 to December 19, 2022 of a representative cross section of 774 institutional investors. In order to qualify for this study, survey participants were required to be managing institutional assets of at least $100 million and play a direct role in the evaluation and selection of investments or asset managers within their organization. In determining the sampling frame for this study, Cogent relied upon the Standard & Poor’s Money Market Directories (MMD) database of institutional investors. To ensure the population for this research was representative of the universe of institutional investors, strict quotas were established based on a nested classification of institutional investor category and size of assets. Minimal weighting was applied to adjust for purposeful deviations from the actual marketplace distribution. The data have a margin of error of ±3.52% at the 95% confidence level. Cogent Syndicated will supply the exact wording of any survey questions upon request.
For more information on the report, please click below.