Allocators Say ESG Is Important, But Returns Matter More

Forty percent of asset owners believe that investing in climate-related funds yields lower returns, according to the latest report from Ninety One.

Chris Ratcliffe/Bloomberg

Chris Ratcliffe/Bloomberg

Environmental, social, and governance issues have become a top priority for many asset owners in the past few years. But returns continue to be the most important consideration when it comes to the investment process.

According to the latest report from Ninety One, a global investment manager with £135 billion ($154 billion) in assets, 60 percent of asset owners in North America have made ESG investing a strategic goal. The firm based the result on a survey of 300 professionals working at asset allocators and advisors across the globe, including endowments, pension plans, foundations, and sovereign wealth funds.

However, 55 percent of all respondents said that the primary concern of their funds is the risk and return performance of the holdings. Moreover, 40 percent of asset owners believe that investing in climate-related funds yields lower returns, according to the report.

These findings only add to the woes of ESG funds, which are already facing headwinds from tightening regulations, mounting fears of a recession, and the rise of anti-woke movements. According to KPMG’s 2022 U.S. CEO Outlook, published last week, 48 percent of asset management CEOs plan to pause or reconsider their ESG efforts over the next six months.

Furthermore, allocators in North America have the lowest adoption rates when it comes to transition finance — a term defined by a Ninety One as “an investment approach that focuses on real-world impact” — with only 17 percent of the North American survey respondents indicating that they’ve adopted the approach. Nevertheless, more asset owners in North America than in any other region believe that transition finance presents a major commercial opportunity, which demonstrates that the motivation to overcome any barriers “is still in place for many,” the report said.

ESG investment challenges are even more evident in emerging markets. According to the report, only 16 percent of the survey respondents said their funds invest in transition-finance assets in developing countries. “We know that the amount of money being deployed for transition finance [in] emerging markets is about 10 percent to 20 percent of what it needs to be if we’re going to achieve the Paris Agreement targets,” said Faith Ward, chief responsible investment officer at Brunel Pension Partnership.