Pension Plans Among ESG’s Biggest Proponents

Institutional asset owners’ stances on sustainable investing have changed over the years, and the current approach broadly embraces the use of environmental, social and governance investing principles.

However, while ESG factors have become an investment touchstone for institutional asset owners, underlying data clarity and strategy implementation remain challenges, a new Morningstar Indexes and Sustainalytics survey found. According to the report, “Voice of the Asset Owner Survey,” pension funds today see sustainable investing as a fundamental element of investing, not some esoteric approach that could damage potential returns.

The qualitative survey found that ESG factors are seen as desirable objectives when used in a tiebreaker context, for example.

As part of the analysis, asset owners were asked to place their organizations on an ESG spectrum that was scored from zero to 12. Those at the bottom believe ESG considerations hamper returns. Moving higher, other organizations see ESG as a financial factor, while others even higher on the spectrum have explicit social or environmental goals. Finally, those organizations at the top said they would even be willing to give up some returns to achieve ESG objectives.

The results show that most respondents view ESG favorably, with many seeing it as a potentially useful financial factor at the very least.

“We heard almost unanimously from the AOs [asset owners] we interviewed that ESG is a critical part of their investment policy and day-to-day thinking,” the report states. “They know it is a very important topic, but they are not always sure how to address it.”

Respondents fell into the range between 3 and 10, with most at 6 or above, and several at 10, the report says.

“This implies that ESG factors are seen as desirable objectives when used in a tiebreaker context,” the report explains. “Those who placed themselves below 6 tended to cite fiduciary concerns as the reason.”

This group said ESG factors should be considered for investment decisions only when there are sufficient financial grounds for doing so.  

Asset owners’ varied ESG approaches were illustrated by their responses to different queries.

One skeptical asset owner, for example, shared the following statement: “We cannot go to pensioners and say, ‘Oh well, your pension’s going to be reduced, because we decided we needed to save the planet.’” Another emphasized that their organization does see ESG as a financial factor, but “not purely a financial factor.”

Asset owners are also asking for more tools, resources and data on ESG to inform their investment decisions, according to Morningstar.

“We need dashboards, and we need specialization,” another asset owner stated. “We just need these tools to be readymade and cookie cutter.”

Another asset owner stated that there is more demand “for raw, granular ESG data … so that people can combine it and use it how they please.”

The qualitative responses are the first phase of the “Voice of the Asset Owner” report. The qualitative responses will be incorporated into a broader, quantitative study covering a larger sample of asset owners, according to Morningstar. The qualitative section gathered responses from asset owners in March 2022 through in-depth interviews with five asset owners in North America and nine in Europe.

According to the survey, one side effect of an increased focus on ESG is lengthened time horizons.  

“If you go back five or six years, ESG wasn’t part of mainstream investing,” one asset owner stated. “That was a problem.”

Asset owners now view ESG as a core element of investing instead of a specialist niche, Morningstar found. Sustainable investing has transitioned from “nice to have” to a “must have,” according to the survey.

The survey also found that both client demand and investment conviction are driving ESG, with some evidence emerging to suggest the impacts of the COVID-19 pandemic have helped to accelerate an embrace of ESG principles.

Morningstar also found that, of the ESG factors considered by asset owners, climate is most prevalent, followed by biodiversity. Among social factors, the topic of diversity, equity and inclusion received the most mentions.