Asset Managers Stand Firm on ESG Integration Despite Political Pressure

October 25, 2022 — Boston

Recent political pressure has not deterred asset owners and managers from committing to responsible investing plans, with climate change remaining a top priority for firms

Divided politics surrounding environmental, social, and governance (ESG) investing have not deterred managers from pursuing an integration approach. 96% of asset managers have or plan to have (2%) an ESG integration approach and are using material ESG information when evaluating underlying investment portfolio companies to identify risks and opportunities, according to The Cerulli Report—U.S. Environmental, Social, and Governance Investing 2022: Social Issues Come to the Forefront.

The U.S. political environment has become increasingly polarized, with disparate views on timely environmental and social-related issues, in particular on climate change. “On one hand, institutional investors and asset managers often feel the heat from moving too slowly on divesting fossil fuel assets, coupled with pressure from radical divestment campaigns,” says Michele Giuditta, director. “On the other hand, pension plans and asset managers, addressing the risk of climate change, could fear penalization by states and politicians who view ESG practices as ideologically driven.” The responsibility of navigating the complexities of these demands falls on asset managers and plan fiduciaries, as these asks do not typically consider the challenges of managing the assets.

Three-quarters of asset managers cite that clients believing ESG investing is driven by political views is at least a moderate challenge to increasing client receptivity of ESG issues, up from 49% in 2021. The political polarization is also impacting distribution, with 46% of financial advisors citing the perception that ESG investing is politically motivated as a significant deterrent to ESG adoption, compared to just 16% in 2021.

These recent pressures faced by investors have not impacted asset managers’ responsible investing plans, with climate change remaining a top strategic focus. According to the research, 83% of managers are making climate-related factors a top priority for new product development, ESG integration (93%), and active ownership activities (94%). Climate change and other environmental issues are also top themes asset owners seek to address when allocating to responsible investment strategies. Climate change/carbon reduction (71%), environmental sector (65%), and sustainable natural resources/agriculture (55%) are top areas of focus.

To alleviate near-term skepticism from investors caused by recent political backlash, Cerulli believes that asset managers need to discuss the merits of ESG and sustainable investing with their clients and reinforce how and why they are using relevant ESG data to drive long-term economic value. Transparency and reporting that validates how ESG information is additive will also be key. “Educating clients on how ignoring ESG risks, such as climate risk, is likely to harm long-term returns will help show clients that ESG is not about politics, it’s about managing investment risks and returns.”

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