New research from State Street Global Advisors has revealed that the need to meet fiduciary duties and regulation are the key drivers behind the adoption of ESG principles among institutional investors.
The report, Into the Mainstream: ESG at the Tipping Point, outlined the key push and pull factors for environmental, social and governance (ESG) principles adoption across 300 institutional investors globally.
Top push factors – or drivers of ESG adoption – include a need to meet fiduciary duty and regulations, followed by ESG risks management for the portfolio.
Top pull factors – or inhibitors of ESG adoption – include a lack of reliable and consistent ESG data, followed by resourcing or cost issues associated with internal integration, infrastructure, knowledge building and a lack of available ESG talent to manage integration.
The research reveals that key drivers for financial institutions are jointly fiduciary duty and a growing regulatory environment; each cited as top push factors by 46 per cent of respondents.
“That fiduciary duty was cited so highly marks a significant development since many investors previously struggled with whether ESG adoption runs contrary to their fiduciary objectives,” State Street Global Advisors head of ESG investments and asset stewardship Rakhi Kumar said. “Alongside regulation, this is now a major driver of ESG implementation.”
For respondents who noted fiduciary duty as their primary consideration, their next and highest ranked drivers – both at 40 percent – were requirements for ethical and social responsibility on behalf of their clients and a desire to mitigate ESG-related risks.
The report found that regional differences exist in the key drivers pushing ESG adoption. At 59 per cent, the importance of fiduciary duty was more pronounced in North America compared to EMEA and Asia Pacific while the region’s next greatest concern, at 48 per cent, was keeping up with the market’s standard-setters.
Within EMEA, regulatory shifts were the clear top “push” factor closely followed by a desire to mitigate against ESG and reputational risks at 52 per cent, 45 per cent and 39 per cent respectively.
Meanwhile, primary drivers for Asia-Pacific investors include mitigation of ESG risks at 47 per cent, fiduciary risk at 38 per cent and pressure from beneficiaries at 37 per cent.
“The research results confirm what we’re hearing from our clients,” State Street Global Advisors APAC head of stewardship Ben Colton said.
“The regulatory environment is clearly driving institutional investors towards a sea change in ESG practices. Over the past year most of our clients have explored what they can do about their portfolios’ carbon profiles and climate-related risks.”
Across all regions, outperformance is considered a less significant ESG adoption driver than risk mitigation.
When it comes to inhibitors of ESG adoption, the chief deterrent cited were the unreliability and inconsistency of ESG data, with 44 per cent highlighting these data challenges as a primary concern.
Weightings ascribed to each “pull” factor vary according to the type of institution in question. Pension funds are most likely to cite an availability of reliable ESG data as their top concern (47 per cent). However, a large proportion of sovereign wealth funds (69 per cent) views internal resource costs as a deterrent, which indicates partnership opportunities between sovereign wealth funds and asset managers to collaborate on ESG planning.
Given the growing prominence of ESG as a materially significant portfolio consideration, an unsurprising 95 per cent of respondents signalled their intention to hire more ESG specialists in the next three years. The remaining 5 per cent intend to encourage their staff to become more familiar with the concept.
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