A new study from global investment manager Federated Hermes revealed continued growth in ESG investing interest by high net worth and institutional investors, with investors increasingly turning to active management strategies to access ESG investments. Despite the increased interest, though, less than 40% of institutional investors reported that ESG risk factors have been implemented in their investment process.
For the study, Federated Hermes surveyed more than 200 U.S. financial advisors and wealth management professionals, 102 institutional asset owners with more than $500 million in AUM, and 100 high net worth individuals with investible assets greater than $1 million.
One of the key findings of the study was the continued growth in interest in ESG by investors, with 95% of advisors reporting that clients had asked about ESG. The strong interest appears to be driving action on the part of the advisors, with 61% reporting that inclusion of ESG considerations in client portfolios increased in the past year, up from less than half who reported this last year. While only around a third of institutional investors said that they currently integrate ESG risk factors in the investment process, more than 40% reported that they are considering implementing ESG integration.
Anne Kruczek, Head of the Responsible Investing Office at Federated Hermes, said:
“ESG is increasingly important for investment professionals as their clients, boards and investment committees are asking for more insights and options. At the same time, institutional investors continue shifting their focus toward ESG alignment with their organizational values.”
Active strategies are becoming increasingly popular for ESG investors, with 46% of institutional investors reporting using actively managed investments as their primary source of ESG investments, and passively managed investments falling to 16% from 22% last year. Similarly passively managed investments as the primary source of ESG investing declined to 22% for high net worth investors, from 37% last year.
While climate issues tend to dominate ESG considerations, the survey explored other ESG-related issues that were top of mind for investors. Data privacy and security takes the top spot of non-climate and environmental issues for investors, with roughly two thirds reporting these factors as “top of mind,” and nearly 80% indicating that these issues have increased in importance over the past year. Diversity, equity & inclusion and supply chain resiliency have also increased in importance for over 60% o respondents.
Mary Green, client portfolio manager for ESG, said:
“With just over a third of institutions and advisors having implemented an ESG-integrated strategy into their investment process, nearly half of respondents said they were considering doing so. We know that investment allocators are becoming more sophisticated about ESG in equity investing and we believe that as ESG investing becomes fundamental investing that asset allocators will look for fixed-income options for their portfolios.”
Other key highlights of the survey include:
- Barriers: definitions and data top the list of barriers to greater ESG adoption, with 59% of institutional investors reporting that few clear definitions of ESG criteria, and the ability to monitor external managers against that criteria as an impediment to ESG investing, and 58% reporting a lack of availability of robust ESG data.
- Quality of disclosure: 72% of institutional investors report being concerned about the quality and consistency of ESG data and measurement coming from portfolio companies and investments.
- Engagement on the rise: 61% of institutional investors view engagement as an ongoing process of working with companies to identify ESG goals and influencing progress towards reaching those goals.
Click here to view the Federated Hermes survey results.