Nearly two-thirds (63%) of investors globally prefer to use active funds to integrate environmental, social and governance (ESG) principles into their portfolios, with equities (80%) over bonds (58%) being the most popular asset classes to gain ESG exposure, according to a new study.
ESG adoption is now widespread, with the proportion of ESG users jumping to 89%, from 84% in 2021, Capital Group says in its ESG Global Study 2022. Asia-Pacific (APAC) saw the largest increase in ESG users of any region (to 88% from 81% in 2021).
“ESG adoption rates appear to be firmly embedded among professional investors globally, with a growing preference for active managers to make the critical investment decisions,” says Jessica Ground, global head of ESG at Capital Group. “This preference underscores the complexity of assessing ESG issues and that reducing them to a single ESG score cannot capture nuanced company evaluations. Investors are hence turning to active managers that can focus on deep proprietary research, robust monitoring systems and engagement to analyze companies.”
The study was based on a survey of 1,130 global institutional and wholesale investors, including pension funds, family offices and insurance companies, as well as funds of funds, retail/private banks and financial advisers, located in 19 markets around the world. It is Capital Group’s second annual study on ESG adoption and preferences.
According to the survey, meeting client needs (27%) and making a positive impact (25%) are the most-cited motivations for adopting ESG. Asia-Pacific investors are most driven by making a positive impact (23%). Compared to North American and European respondents, twice as many APAC investors also attach most weight to improving performance (21% against 10% in North America and 10% in Europe) as a driver for ESG adoption.
The survey also finds that, compared to those in other regions, more Europeans consider ESG to be “central” to their investment approach (31% versus 26% globally), while investors in North America have the least conviction in ESG, with less than one in five reporting that ESG is central to their investment approach (18%), behind those in APAC (22%).
Meanwhile, the percentage of Asia-Pacific investors who remain on the sidelines about ESG has decreased to 10% in 2022 from 16% in 2021. Non-adoption of ESG among investors in the region has also shrunk, from 3% to 1% during the period.
Globally, almost four in 10 (39%) agree that a lack of product innovation is holding back greater ESG adoption. This is most significantly echoed in the APAC region (48%). ESG integration remains the most used implementation strategy (59%) by investors globally.
The study also finds that environmental issues are overshadowing the S in ESG globally. Half (50%) of the respondents say a fund’s ability to meet the United Nations’ Sustainable Development Goals (SDGs) is an important consideration when making fund selections. Almost two-thirds (64%) of them believe that helping companies transition to a green future is key to solving the climate crisis.
The E of ESG continues to dominate allocation preferences, with an increase of share from 44% in 2021 to 47% in 2022. However, 41% of investors express concern that social issues are being overlooked in favour of climate considerations.