The Markets January 10, 2018

Number of Institutional Investors Using ESG Factors in Decisions Holds Steady

Only 39% of institutional investors surveyed by Callan that do not include ESG factors in investment decision-making said the value proposition for ESG remains unclear, down from 63% in 2016.

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Adoption rates of environmental, social, and governance (ESG) factors into the investment decision-making process among institutional investors has leveled off, according to the Callan 2017 ESG survey.

Overall incorporation of ESG factors into investment decision-making plateaued at 37% of respondents in 2017, on par with 2016 (37%) and up from 2013 (22%). Callan says this trend reflects changing survey respondents over time (a larger portion of smaller and corporate funds responded in 2017 than in previous years), as well as multiple years of investor education around ESG coming to fruition.

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Further suggesting a plateau in adoption rates, 7% of respondent firms that have not yet incorporated ESG factors into investment decisions were considering doing so in the future, down from 22% in 2016. There has been a 68% increase in the rate of ESG adoption since inception of Callan’s survey in 2013.

The largest of funds (with $20 billion in assets under management or more) continued to incorporate ESG factors into the investment decision-making process at a much higher rate than their smaller counterparts: 78% for the largest funds compared to 30% for the smallest funds ($500 million in assets or less).

Foundations reported the highest rate of ESG incorporation (56%) in 2017, followed by endowments (39%), public funds (35%) and corporate funds (25%).

The top implementation method for survey respondents that are incorporating ESG into investment decisions in 2017 was to add language to the investment policy statement (50%). The top reasons cited for incorporating ESG factors into investment decisions in 2017 were:

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

More than half (61%) of U.S. institutional investors that responded to the survey have not incorporated ESG factors into investment decision-making, in line with 2016 (60%). The most common reason cited in 2017 was that the fund would not consider any factors that are not purely financial in the investment decision-making process (41%). The next most popular answer was that the value proposition for ESG remains unclear (39%). Callan notes this is down from 63% in 2016.

Callan’s 2017 ESG Survey reflects input from 105 unique institutional U.S. funds and trusts with more than $1.1 trillion in assets.
The Markets January 10, 2018

Investor Type Sways Median Fee, Use of Active Management

Down from a high of 84% in 1996, twenty years later the majority of the assets owned by respondents, 69%, are still actively managed.

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Institutional investment management fee payment practices and trends are the subject of the Callan 2017 Investment Management Fee Survey.

The research reflects trends in 2016 fees assessed by 59 U.S. funds and trusts and 279 investment management organizations, the firm explains.

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Overall the most frequently cited concern regarding fees is “whether or not active managers are providing the value-add to justify the fees.” Also important at a high level, Callan finds a 15% decrease in use of performance-based fees among investment managers since 2014. Even with greater concern voiced about the justification of active management fees, the majority of the assets owned by U.S. fund respondents, 69%, are actively managed. This is down from a high of 84% in 1996.

The median fee charged for investment management, according to Callan researchers, is 38 basis points. This figure does not tell the whole story, as the investor fund type seems to have a big impact on the fees paid. In fact, the data shows a median 36 bps fee for public funds, a 68 bps fee at the median for endowments and foundations, and a 37 bps median for corporate funds. The median investment management fees paid by endowments/foundations in 2016 was up 24% over 2014.

The research suggests median investment management fees vary quite widely by asset class, as well. For fixed income, it is 21 bps; for U.S. equity, 34 bps; for global equity, 45 bps; and for alternatives, it is 90 basis points. Managers seem to be urging more clients to allocate more to the alternatives category, as the increase in allocations to alternatives since 2014 has been significant. For public funds, investments in alternatives are up 17%; for corporate funds, 17%; and for endowments and foundations, 6%.

Highlighting a well-established industry fact, Callan says smaller funds paid a premium for investment management relative to other fund sizes: “Funds with less than $1 billion in assets paid 65% more than medium funds ($1 billion to $10 billion in assets) and 91% more than the largest funds (greater than $100 billion in assets).”

Digging into the data provided by asset managers, Callan researchers find managers’ allocation to bonuses as a percent of revenue in 2016 was 18%, down from 24% in 2014. The most dramatic change was seen in non-U.S. fixed income (down 19%), Callan reports, followed by hedge funds and global equity (down 13%, each). At the same time, the percentage of revenue allocated to cover the cost of operations increased dramatically, from 42% to 60%, on average. Manager profit margin as a percentage of revenue decreased from 34% in 2014 to 22% in 2016, on average.

The full report can be downloaded here.

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