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McKinsey: ESG No Longer Niche as Assets Soar Globally

Sustainable investments have increased to 26 percent of professionally managed assets around the world.

  • Amy Whyte

More than a quarter of the $88 trillion assets under management globally are now invested according to environmental, social and governance principles known as ESG, a McKinsey & Co. study found.

Sustainable investing has become “a large and fast-growing major market segment,” with ESG being integrated into portfolios at a growth rate of 17 percent a year, McKinsey said in a report published October 26. Japan’s Government Pension Investment Fund, Norway’s Government Pension Fund Global, and Dutch retirement fund ABP are among the large institutional investors that practice sustainable investing, the firm said.

ESG accounted for $22.89 trillion, or 26 percent, of professionally managed assets in Asia, Australia, New Zealand, Canada, Europe and the U.S. at the start of 2016, according to the report. That compares with 21.5 percent in 2012.

More institutional investors than ever before “recognize environmental, social, and governance factors as drivers of value,” Sara Bernow, a McKinsey associate partner who co-authored the report, said in a statement on the findings.

Integrating ESG factors into the investment process is “critical to investing effectively,” Bernow said.

European investors lead in sustainable investing, with 52.6 percent of the region’s assets invested according to ESG factors at the beginning of 2016, the study found. Just over half of assets in Australia and New Zealand were invested in sustainable strategies, while 37.8 percent of Canadian investments followed ESG principles.

In the U.S., 21.6 percent of assets were allocated to sustainable investments at the start of last year, while Asia was much farther behind on the trend. Only 3.4 percent of Japanese assets were in sustainable investments, McKinsey said, while Asian countries outside Japan had less than 1 percent of assets tied to ESG.

McKinsey said the gap is narrowing, though, with the volume of sustainably managed assets growing “significantly faster” in countries outside Europe between 2014 and 2016.

The consulting firm interviewed more than 100 chief executives, chief investment officers, ESG leaders, and investment managers for its study. The belief that sustainable investing can increase returns – or at least produce “market-rate returns as effectively as other investment approaches,” was among the primary motivations for adopting ESG principles, the firm found.

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McKinsey said investors believe integrating ESG factors into their approaches strengthened risk management and aligned their investment strategies with the priorities of beneficiaries and stakeholders. Common techniques used to adopt ESG principles included screening – both negative and positive – and shareholder engagement.

“While some are struggling to define their approach and to make good use of ESG-related information, our interviews with institutional investors make clear that this doesn’t have to be the case,” McKinsey said.

The methods that the investors already use “to select and manage portfolios are highly compatible with sustainable strategies, and close integration can have significant benefits for institutional investors and beneficiaries alike,” the firm said in the report.