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‘I Will Get Very Serious About ESG — But Not Yet,’ Allocators Claim

If institutions stick by their predictions, the majority will only give money to ESG-minded managers in a few years.

Asset managers that ignore environmental, social, and governance factors may find themselves losing out on big mandates.

In a recent survey of 110 asset owners globally, Morgan Stanley found that the plurality (35 percent) see themselves allocating only to managers with formal ESG policies in coming years, but are not doing so now. More than one in five (22 percent) already refuse to hire managers lacking sustainability credentials.

The survey covered staff at billion-dollar-plus pension funds, endowments, and other institutions in North America, Europe, and Asia. Among those planning to limit allocations to ESG-friendly managers, 42 percent said they would require a formal sustainable investing policy within two years, while 39 percent planned to make ESG a must-have within five years.

“These results provide an additional proof point that sustainable investing has become table stakes,” said Audrey Choi, CEO for the Morgan Stanley Institute for Sustainable Investing, in a statement.

And demand for ESG may grow further as result of the coronavirus pandemic. While the Morgan Stanley survey was conducted at the end of 2019, managers and allocators polled this month by Institutional Investor indicated increased interest in environmental, social, and governance strategies amid the public health crisis.

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The poll — conducted for the weekly II Fear Index — found that institutional investors were more bullish than bearish about ESG strategies over the next year. Asked specifically whether the coronavirus pandemic had impacted their views, 35 percent said the crisis had strengthened the case for ESG. Just 13 percent said the pandemic weakened the case for ESG, while the rest said it had little or no effect.

Such views may have been shaped by the performance of ESG strategies during the March sell-off. Research by HSBC concluded that stocks with high ESG scores outperformed during the early weeks of the pandemic, while S&P Global reported in early April that some of the biggest ESG funds had better year-to-date returns than the S&P 500 index.

According to Morgan Stanley’s survey, 80 percent of asset owners have already incorporated ESG into at least parts of their portfolios, with another 15 percent “actively considering” doing so. Those surveyed said the biggest reason for adopting ESG was demand from their constituents — for example, pensioners or university alumni. 

As for the benefits that ESG adoptees have observed, 49 percent of respondents cited improved engagement among stakeholders, while 34 percent reported enhanced financial performance. The most popular answer, given by 63 percent of allocators, was that ESG investing burnished their reputations.

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