Key examples of these measures include the Morningstar Sustainability Ratings for Funds; S&P’s Essential Sustainability Data Intelligence Service, which provides global coverage of individual companies across multiple factors; and the EU’s wide-ranging directives for reporting of non-financial information.
While the data for evaluating investments is growing, institutions are also setting specific standards to their own objectives for sustainability. The largest cohort of institutions are the 50% adopting the United Nations Principles for Responsible Investing (UN PRI). In this, the asset owners adopt six key principles that act in the best long-term interests of beneficiaries, and as fiduciaries, they believe environmental, social, and corporate governance (ESG) issues can affect the performance of investment portfolios.
Another 47% also adhere to the United Nations Sustainable Development Goals (SDGs), 17 goals ranging from clean water and sanitation to renewable energy to good jobs and economic growth. Adoption of SDGs has been particularly strong in Asia, where 57% of institutions apply them to portfolios.1
As expected, there is a stronger regional bias to regulatory standards. For example, 41% of institutions in North America say they rely on Sustainable Accounting Standards Board (SASB) data for reporting on sustainability issues by publicly traded companies, as 55% of its membership is based in the US. Globally, the number is only 29%.1
Similarly, one-third of institutions in EMEA say they follow the EU Paris Aligned Benchmarks to analyze environmental performance compared to the standards for emissions set out by the Paris Agreement. And 32% of institutions in the UK focus on the Taskforce on Climate-Related Financial Disclosures (TCFD) for reporting standards.1
6) DE&I is coming into focus for investors.
Like much of the business world, institutional investors are paying closer attention to Diversity, Equity & Inclusion (DE&I), not just as investors but also as employers. In fact, 72% of institutions report their organization has either implemented or is considering implementing DE&I measures internally. DE&I efforts are growing within their organizations; 47% of those surveyed say their organization has expanded its definition of DE&I in the past year.1
On the investor side, they are also paying closer attention to DE&I. Close to half (48%) report they are increasingly focusing on DE&I factors among the companies they invest in. Overall, 43% are measuring those DE&I factors, including 56% of those in the UK. In fact, more than one-third (34%) go so far as to say they exclude companies with poor DE&I performance from their portfolios.3
In terms of what kind of impact DE&I has within the companies they are investing with, institutions look at both the rank and file and management within the organization. In probably the strongest indication of how they might see these factors affecting the bottom line, more institutions say they look at board diversity (54%) than look at workforce diversity (47%).1
7) Institutions recognize they have considerable leverage in the ESG equation.
Institutional investors report a wide range of motivations for implementing ESG. Aligning assets with organization values still ranks at the top of the list, with just under half (48%) reporting that this is driving their actions on ESG, at least in part, and most frequently with institutions in North America (55%).1
More specifically, four in 10 report ESG efforts are driven in large part by mandates within their organization’s investment policy statement.1 This could be represented by something as far-reaching as goals for net zero emissions, or something more specific, such as being in agreement with SASB standards or TCFD standards depending on where they are located.
But the third most frequent response is most aligned with their roles as investors – to influence corporate behavior. In fact, 27% of institutional investors say they implement ESG to help meet this investment objective.1 While it may be tempting for naysayers to suggest that this is all about getting companies to adopt more progressive environmental and social policies, it is important to understand that this motivation may be tied more to the G than the E and the S.
In terms of corporate governance, institutional investors literally have a vested interest in ensuring that the companies in which they invest are transparent about their operations, their accounting, and the risks presented by their business. It’s a role that institutional investors take seriously.
In fact, when asked who should have the greatest influence over corporate behavior, institutional investors start with the government and regulators (55%) who set the laws and rules business must follow. Corporate management and boards (54%) who are responsible for executing business plans and operations within those parameters rank next.1