Institutional investors such as pension funds, mutual funds, money managers, insurance companies, banks, hedge funds and private equity firms, are, in the first instance, acting on behalf of private investors and with demand for sustainable assets growing fast, institutional investors are gearing up to ‘hunt down’ ESG-compliant investment opportunities for their clients by further improving screening methods and data collection and upskilling their staff on ESG – a Franklin Templeton study found in 2019 that 80% of institutional investors are in the process of allocating more resources to improve their ESG knowledge and capabilities in this area.
At the same time, there’s more to it than institutional investment firms simply following through with what their private clients demand. Many of their boards have been voicing their own views on how sustainability matters, publicly acknowledging in the past few years that it’s imperative for corporates to have a positive impact on society, which goes well beyond trying to maximise the financial gains for shareholders. In a recent global KPMG survey, 84% of over 150 institutional investors stated that maximising shareholder returns can no longer be the primary goal of companies, while 86% said they would accept a lower return if it meant investing in a company that addresses sustainability considerations.
Action speaks louder than words: 85% of CFA Institute members now (in 2020) take E, S, and G factors into consideration in their investing, up from 73% in 2017. 63% use companies’ ESG ratings as a part of their investment selection process and 40% of investment professionals incorporate climate risk into their analysis. Also, about one-third of the CFA institute members have dedicated ESG specialists, and a third have portfolio managers conducting ESG analysis.
Prominent examples of institutional investors calling for a shift in the public and corporate mindset include Black Rock CEO Larry Fink, who announced in January 2020 in his annual letter to clients and corporate CEOs that his firm, which has almost $7 trillion assets under management (AUM), would make sustainability integral to its portfolio construction and risk management, exit investments that present a high sustainability-related risk and launch new investment products that screen fossil fuels. Likewise, the Net Zero Asset Managers initiative, a group of 30 international asset managers totalling $9 trillion in AUM, has set itself the goal of achieving net zero carbon emissions across their portfolios by 2050 with interim 2030 targets.
Most importantly, pension funds holding an estimated $20 trillion in assets, the single largest asset pool in the world, have finally thrown their financial power behind the transition to a sustainable global economy, which will no doubt boost the sustainable investing market.
Faced with rapidly aging populations and solvency issues, many pension funds have been slow to adopt ESG investment practices, however, while only 55% of European pension schemes said in 2019 that they consider ESG risks as part of their investment decisions, this number shot to 89% in 2020, a Mercer study shows. And leading the way, in June 2020, the Universities Superannuation Scheme, the UK’s largest pension scheme, announced that over the next two years it will be divesting from companies involved in tobacco manufacturing, coal mining and weapons manufacturers, where this makes up more than 25% of their revenues. This amounts to a reported £1.6bn in assets and is perhaps the largest recent example of the changing approach to sustainable investing in pensions.
While regulatory changes, such as the European Union’s IORP II and the Action Plan on Sustainable Finance, and industry groups like the Pensions Climate Risk Industry Group, have contributed to this shift, 51% (compared to just 29% in 2019) said in the same survey they were driven by the potential impact on investment returns, emphasising the fact that the reality of the catastrophic consequences of climate change on the planet as a whole and specifically on businesses is sinking in.