Institutional Investors Embrace ESG Factors in Decisionmaking

Incorporation of ESG factors in investment decisionmaking doubled for corporate plans since last year.

In 2016, 37% of institutional investors have “incorporated ESG factors into decision making,” up from 29% in 2015 and 22% in 2013, according to Callan’s fourth annual survey to assess the status of environmental, social, and governance (ESG) factor integration in the U.S. institutional market.

Some of this increase appears to be driven by funds in the health care sector, which saw particularly high adoption rates (62%). Endowments (53%) and foundations (48%) continue to be the highest adopters relative to other fund types, though corporate funds saw a material uptick in incorporation relative to a year ago, doubling from 15% in 2015 to 30% in 2016.

By fund size, large funds (greater than $3 billion in assets) tend to have higher rates of adoption of ESG factors into investment decision making than smaller funds. The largest funds (with more than $20 billion in assets) had the highest adoption rates at 71%.

The most common implementation of ESG is to add language to the investment policy statement (cited by 53% of respondents that incorporate ESG). The greatest barrier to funds incorporating ESG into investment decision making continues to be a lack of clarity over the value proposition (cited by 63% of respondents that do not incorporate ESG).

This year there were 84 unique institutional U.S. funds that responded to the survey, representing approximately $843 billion in assets. The research report is available on Callan’s website. A free registration is required.