Data & Research November 24, 2015

Institutional Investors Increasingly Consider ESG Factors

However, that increase was not seen in corporate retirement plans, according to a Callan survey.
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The number of U.S. institutional investors that incorporate environmental, social and governance (ESG) factors into investment decision making increased from 22% in 2013 to 29% in 2015, according to results of a Callan survey.

The investment consultant’s 2015 ESG Interest and Implementation survey found that, by fund type, foundations (39%) and endowments (37%) have the highest rates of ESG adoption. Public fund usage of ESG factors has nearly doubled in the past two years, from 15% in 2013 to 27% in 2015.

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However, ESG adoption by corporate funds was flat from 2013 to 2015 at 15%. But, the survey revealed substantial differences when plan type is considered. The percentage of corporate defined contribution plans that are incorporating ESG (24%) is significantly larger than the percentage of corporate defined benefit plans (7%) that are doing so.

Incorporation of ESG factors increases with fund size: 35% of funds larger than $20 billion use ESG in some aspect of investment decision making, while 26% of funds with less than $3 billion incorporate ESG factors.

Callan’s survey was conducted in September, one month before the Department of Labor issued an interpretive bulletin to clarify that consideration of ESG factors can be acceptable under the right circumstances. The firm acknowledged the guidance could affect future survey results.

NEXT: Products using ESG factors

Callan conducted a separate survey of its proprietary investment manager database, which tracks more than 7,000 investment products. Overall, 20% of investment managers in Callan’s database have responded to questions regarding ESG practices for their products.

The survey found 14% of all products in Callan’s database utilize ESG in investment decisions. Global equity has the highest percentage of products using ESG factors at 25%, followed closely by real estate (24%) and non-U.S. fixed income (23%). U.S. equity strategies are the lowest at 9%.

When asked why they incorporate ESG into the investment process, the most popular response across asset classes was risk mitigation (48%), followed by alpha generation (27%).

Callan’s 2015 ESG Interest and Implementation survey incorporates responses from more than 240 unique institutional funds representing approximately $2.4 trillion in assets. A report of findings is here.

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