By Edward Leung
A global survey of more than 500 institutional investors conducted by State Street Corporation revealed that, while the majority (72%) of Asia-Pacific (APAC) institutional investors are implementing an environment, social and governance (ESG) framework in their investment process, the lack of transparent, standardized, quality data remain a significant barrier in their adoption of ESG strategies.
The study is led by State Street’s Center for Applied Research and co-authored by Professor Bob Eccles of the Harvard Business School. It comprised a global survey of 582 institutional investors who are, or plan to, implement ESG into their investment process and 750 individual investors.
The study found that many of the traditional barriers to ESG integration are receding:
- 60% of surveyed institutional investors in APAC (67% globally) believe it’s possible to align material ESG issues and financial performance; 58% (65% globally) also do not believe ESG equals lower returns.
- Just 8% of APAC survey respondents (10% globally) say they view fiduciary duty as a barrier to ESG integration
- 71% of APAC survey respondents (74% globally) see three-plus years as a realistic timeframe to gain outperformance from ESG investments
However, the study also reflected a clear outcry for transparent, standardized and quality ESG data.
“The promise of ESG integration starts with data,” said Lou Maiuri, executive vice president and head of State Street Global Exchange and Global Markets businesses.
“It is grounded in data transparency, engagement and the goal of creating a future intelligent approach to investing. Having a custodian for data has become just as critical as having a custodian for financial assets when trying to deliver long-term value creation for all investors and the society as a whole.”
A large majority (87% in APAC and 92% globally) of institutional investors surveyed want companies to explicitly identify ESG factors that materially affect performance, while 58% in APAC (60% globally) note a lack of industry standards for measuring ESG performance as a significant barrier to full integration.
Half of the surveyed APAC retail investors (46% globally) want to see more companies reporting ESG performance-related data, and 56% in APAC (46% globally) say they need more ESG data from other sources to make educated decisions.
According to State Street, there are 5 crucial keys to better ESG adoption:
- Take ownership: Walk the talk-30% surveyed APAC individual investors say management support is key to removing ESG barriers; for individual investors it’s about the alignment of portfolio decisions to what they believe is important.Make sure there is decisive support from the organizations’ c-suite and board on ESG issues.
- Get educated: Make ESG part of the investment lexicon-Provide training on ESG across the investment organization, particularly sector portfolio managers and analysts.
- Ask: Get the data and solutions you need-In addition to asking companies for data, support industry efforts for increased standardization of ESG data and reporting requirements, and enable meaningful conversation between financial advisors and individual investors.
- Incorporate a materiality filter: Get the right, material data-It’s not about having to access to all of the information, it’s about having access to the right information.
- Align time horizons: Adjust performance metrics and incentives structure to reflect the long-term nature of ESG investing-
72% surveyed institutional investors in APAC believe outperformance by funds integrating ESG factors would be useful in improving ESG integration.
However, as a performance-focused region, APAC still has room for improvement when it comes to having the right metrics and incentives structure for ESG investing.
42% of asset owners in APAC have an investment time horizon of more than ten years, but only 8% measure their external manager’s investment performance in the five years or longer timeframe.
“Asia Pacific institutional investors are placing an increasing importance on sustainability and climate-risk when they assess their portfolio holdings. We’ve seen significant progress in investors’ understanding of ESG over recent years but believe further progress can be made to move more investors from awareness to full ESG integration,” said Maiuri.
“By creating a clear intersection between our core company values and how we help clients achieve their outcomes, we can turn aspiration into action.” BM