More Than Four in 10 Institutional Investors Incorporate ESG

Among foundations, that is 64%, according to a Callan report.

Forty-three percent of institutional investors incorporate environmental, social and governance (ESG) factors into their investing, up from 22% in 2013, according to a new report from Callan, “2018 ESG Survey.” Sixty-four percent of endowments incorporate ESG, up from 35% in 2013.

The most modest increase in ESG adoption was among corporate funds, with 20% of them using ESG in 2018, up from 14% in 2013. Thirty-nine percent of public funds incorporate ESG, up from 15% in 2013. Fifty-six percent of endowments incorporate ESG factors, up from 22% in 2013. Seventy-two percent of large funds, those with $20 billion or more in assets, incorporate ESG factors.

Among the funds using ESG, 55% use it for every investment/manager selection, and 41% are planning to broaden their use of it. In the U.S., however, the latter figure is only 8%. Among those not using ESG, 15% are considering it. Thirteen percent of defined contribution (DC) plans offer an ESG option in their investment lineup, and 40% of defined benefit plans incorporate ESG.

Asked why they incorporate ESG factors, 42% of the investment managers expect to improve their risk profile, 34% think it is part of their fiduciary responsibility, and 34% have other fund goals besides maximizing risk-adjusted returns.

Among those not using ESG, 52% of the investment managers say they only consider financial factors in their investment decision-making process. Nearly half also said there is no research tying ESG to outperformance.

Asset classes for which the investment managers would like to see more ESG-focused product offerings are U.S. equities (36%), global equities (25%), emerging markets equities (24%) and private equity (22%).

Callan conducted the survey among 89 institutional U.S. funds. The full report can be downloaded here.