The Surprising Reason That Allocators Are Embracing ESG

Boards and stakeholders — not the promise of stronger performance — are driving ESG investing, new data shows.

Qilai Shen/Bloomberg

Qilai Shen/Bloomberg

A recent survey of a “wide swath” of asset owners shows that pressure from their respective boards is the primary reason they’re working to incorporate environmental, social, and governance measures into the investment process.

According to the survey, which was conducted by software firm Vidrio Financial and boutique advisory firm Close Group Consulting, 72.73 percent of respondents said that board and stakeholder demand was the top reason for ESG integration. Announcements this fall by a number of university endowments — who have long been the targets of student-led divestment groups — that they plan to go fossil fuel-free would seem to bear this out.

The number of limited partners looking to incorporate ESG measures in their risk and opportunity assessments is likely to grow, according to the data. While 38.46 percent of respondents said they’re already incorporating ESG, another 23.08 percent said that while they haven’t done so yet, they’re planning to.

However, while interest in ESG investing is on the rise among allocators, it appears that they’re not quite ready to put their money where their mouth is. None of the respondents said that they consider ESG performance or metrics as part of their compensation plans for their investment managers. “While this finding was somewhat surprising [given] the large amount of information we hear from both allocators and managers on the importance of ESG,” the survey said, “[it] also identified a divergent set of opinions and approaches that reflect the somewhat complex nature of implementing an ESG strategy generally.”

This divergent set of opinions shows up time and again for allocators, few of whom share the same definition of what constitutes ESG investing. And it’s not exactly their fault — 41.67 percent of respondents said that the challenges surrounding ESG data are the biggest roadblock to investing. “A lot of these findings [were] not unusual, given the lack of consistency [in the views about] ESG integration and agreements on data and metrics, [which] both Vidrio and CGC have seen through our relative experiences,” the survey said. “True ESG integration is an issue that investors and allocators alike have been wrestling with for many years, [and it’s] not something we feel is going to be simply resolved over time.”

While Vidrio and Close Group did not reveal the number of survey respondents, the results did show that 85 percent of the respondents were based in North America. Endowments made up the largest set of allocators, at 31 percent, while the “other” category followed with 23 percent.