Environmental, social, and governance (ESG) investing strategies are in high demand for 80% of foundations and 76% of endowments—and will continue to increase. Driven by constituents (or end beneficiaries) and missions that align with sustainable outcomes, incorporating the guiding principles of ESG into their portfolios is a high priority for asset managers, according to new research issued by Cerulli Associates and sponsored by Russell Investments. The research was compiled from interviews conducted in the third quarter of 2021 with 20 leading institutional asset owners and asset managers. It also leverages data and insights from Cerulli’s existing suite of research on the institutional asset management space.

Asset owners interviewed for this report are increasingly influencing the companies in which they invest by working with their asset manager partners to align their proxy votes with their organization’s values and principals. According to the research, several asset owners have sought to use their investment portfolios to offset their carbon footprints by investing in technologies like carbon recapture. In response, asset managers are incorporating more environmental themes into their ESG process with climate change/carbon (90%), energy efficiency (85%), and pollution (79%) cited as their top priorities. “Nearly all managers who participated in the research reported having proprietary research efforts on climate investing, often housed within a dedicated team. Others report incorporating climate metrics into capital market assumptions or actively researching transition and physical risks, often looking at various scenarios and their implications for portfolios,” adds James Tamposi, senior analyst.

According to the research, asset owners often rely on their intermediaries—investment consultants and outsourced chief investment officers (OCIOs)—to provide guidance. “Intermediaries play a pivotal role in the integration of ESG factors. Investment consultants are charged with helping asset owners implement ESG considerations and opportunities and regularly collaborate with their asset owner clients,” comments Tamposi. Supporting this, research from Cerulli’s 2020 survey of OCIO providers found that 87% had resources dedicated to ESG incorporation and 97% considered ESG factors when conducting manager due diligence.

Asset managers with a presence in Europe say demand from European clients often drives the evolution of their ESG capabilities. These managers say Europe is ahead of the U.S. and other markets in sustainable investing, and the influence of regulators in these regions further amplifies their rate of adoption. This trend is especially pronounced when it comes to climate change. According to Russell Investments’ 2021 ESG Asset Manager Survey, 97% of managers in Continental Europe said climate risk/environmental issues tend to dominate their conversations with asset owners.

While asset owners and managers are committed to incorporating climate considerations, they are challenged by multiple sources of conflicting data and gaps in available data. Both asset owners and managers struggle with sourcing, aggregating, and interpreting data from the universe of climate data providers. “It is perhaps the most critical challenge facing the industry,” says Tamposi. “Data sourcing, compounded by a lack of reporting disclosures, makes it especially difficult for investors looking to build a framework, particularly for U.S. holdings,” he adds. As asset owners and managers continue to streamline their processes, they are likely asking U.S. companies for the same metrics European companies are required to disclose, providing an avenue for global standardization, according to the research.

Looking forward, allocating resources to implement climate investing is top-of-mind for both asset owners and managers. Rather than simply having their investment teams adopt a new investing lens, several managers have hired heads of ESG and/or ESG specialists to assist in developing frameworks and ultimately integrating ESG policies into their overall investment approach. “Implementing a climate investing lens or ESG more broadly is a complex process that takes time. No matter where they are in terms of progress toward incorporating these initiatives, asset owners and managers anticipate their approaches will continue to evolve over time,” concludes Tamposi.

Founded in 2021, Russell Investments’ 10x10 Partner Innovation Lab is a discussion of perspectives among 10 institutional asset owners and 10 asset managers.  

• Institutional asset owner participants include: Fujitsu Global, Mazda Motor Company, Microsoft, Mitsubishi Electric, Nestle, Roche, Robert Wood Johnson Foundation, The Boeing Group, The New York Presbyterian Hospital, Thomas Jefferson University, Unilever 

• Participating asset managers include: BlackRock, Brevin Howard, Hamilton Lane, Oaktree Capital Management, J.P. Morgan Asset Management, Morgan Stanley, Putnam Investments, RBC Global Asset Management/BlueBay Asset Management, Wellington Management, Western Asset Management Company