The move towards environmental, social, and governance (ESG) investing is still being led by the largest asset owners, typically government-owned pension funds, sovereign wealth funds, and insurers, but they are expected to influence the behaviour of small-and mid-sized institutional investors in the coming years, Cerulli’s survey shows.

According to the research, the majority of respondents have incorporated ESG considerations into their investment decision-making processes, indicating a growing realization of the need for ESG-based investing. About two-thirds of asset owners also said their firms have an investment policy statement specifying ESG priorities and principles.

Cerulli’s survey findings also show that large institutional investors, especially in Australia and Hong Kong, are progressively moving towards systematically incorporating ESG factors in assessing risks and opportunities during financial analysis. Australian investors are advanced in their integration of ESG principles in their investment portfolios, with ESG integration being the most widely employed method, followed by active ownership.

As asset owners increasingly align their portfolios to ESG standards, managers will need to meet their growing expectations. Asset owners are expected to use managers’ ESG expertise, even as they embark on building their capabilities. Our survey findings show that 48% of asset owners have built ESG teams, while almost three-quarters of them look for external managers’ expertise to acquire ESG knowledge. Some 70% of pension plans are looking to build their capabilities over the next three years, a finding that managers should take note of to seize potential opportunities.

When outsourcing portfolio management to external managers, integration of ESG factors into investment processes is currently not mandatory for two-thirds of asset owner respondents, and Cerulli’s industry discussions show that mid- and small-sized institutions have been slow to embrace the concept.

However, a significant majority of respondents to Cerulli’s survey deem the ESG aspect as either “very important” or “moderately important” when hiring managers. Close to half (48%) of asset owners deem the ESG aspect is “very important” when hiring managers, with another 48% saying it is “moderately important”. As ESG adoption progresses and asset owners’ expectations of managers on reporting requirements on ESG issues increase, managers will have to demonstrate their capabilities in this area.

“Against the backdrop of COVID-19 and environmental calamities, along with the strong push from policymakers, ESG-based investing is expected to evolve at a faster rate,” said Leena Dagade, associate director. “As awareness of the concept rises, investors are expected to take cognizance of not only material financial risks to their investment portfolio, but also external risks such as environmental and social factors that could pose risks to business operations, weighing on financials and impacting investment returns. Hence, it is necessary for managers to stay relevant by building ESG teams and investment capabilities to grab a share of the institutional business.”