A new survey by Macquarie Asset Management into the state of ESG integration by institutional investors revealed insights including a heightened focus by a large majority of investors on ESG factors within the investment process, and an evolution in ESG considerations from processes to outcomes, with investors increasingly looking to analyse and measure the impact of their investments.

For the study, Macquarie surveyed 180 real asset investors, representing over $21 trillion in assets under management, including asset managers, banks, consultants and investment advisors, foundations and endowments, insurance companies, and pension funds. By region, 22% of respondents were in the Americas, 36% EMEA, 31% Asia and 11% in Australia and New Zealand.

The survey found a sharp increase in investors’ ESG focus, and expectations for this trend to continue, with 85% reporting their organization’s general focus on ESG had grown over the past 2 years, and 89% expecting a greater focus over the next 2 years. Within the investment process, 50% reported that ESG factors have a “significant influence” on their firm’s investment decisions, compared to less than a third who said this in 2019.

From a practical perspective, this increase in focus has seen to a growing shift in assets and resources to ESG. 59% of respondents reported that their organizations have a dedicated ESG function, up from 47% two years ago, and 82% expect increased allocations to products that integrate sustainability practices over the next 2 years.

Investors cited several considerations driving their firms’ ESG considerations within the investment process, with risk profile reported by 74% as extremely or very important, followed by corporate reputation by 72%. Investment performance has also become a driver of ESG considerations, with 74% reporting that a good sustainability strategy leads to improved returns, and only 3% saying that it involves sacrificing returns.

The report also found an increased focus on analyzing, assessing and communicating the ESG impact of their investments. 61% of respondents reported that they have increased allocations to investment strategies or managers that target specific ESG outcomes, and nearly two thirds said they have increased analysis and disclosure of non-financial ESG outcomes.

Despite the increased ESG focus, the survey found that the investors’ organizations do not typically link ESG outcomes with pay. Only 14% of respondents said that compensation is tied to ESG performance, compared to studies which show that over half of S&P 500 companies do so. 35% of respondents said that they believe compensation should be linked to ESG performance.

By topic, climate is clearly top of mind in terms of ESG considerations, with 55% citing climate change as the their top ESG priority, significantly ahead of ‘exclusions for controversial sectors’ at 18%, and only 5% of managers selected diversity and inclusion.

Digging deeper into climate, 35% of investors reported that their organizations have committed to align portfolios with 2050 net zero goals, while another 46% said that they definitely, probably or partially expect to do so over the next two years. Fewer than half of the organizations track all or some of their portfolios’ GHG emissions, while another 24% plan to track emissions in the future. 44% said that they require some form of climate risk disclosures from portfolio companies.

Phil Peters, Head of Macquarie Asset Management’s Client Solutions Group, said:

“While the results of the survey highlight the progress the institutional investment community has made in incorporating ESG factors into their investment approach, our survey also highlights the many challenges such investors continue to face in better understanding and managing how physical and transition risks posed by climate change may impact their investment portfolios. This is not a straightforward process given the diverse nature of most portfolios, which means asset owners and asset managers will play a key role in supporting investors as they seek to identify, assess, and manage both existing and emerging ESG risks and opportunities.”

Click here to view the survey results.