Global investment data provider Morningstar are out with their annual Voice of the Asset Owner survey, possibly including some of you, and their possibly surprising top heading for those in the US: 'Two thirds of asset owners globally say that ESG has become more material in the last five years.'
What does 'more material' mean, and where has it come from?
As we’ve written elsewhere, ESG is not your faith’s values, but it’s a term often used as shorthand for values-based investing. Morningstar surveyed ~500 asset owners, split roughly 40 / 40 / 20 between Europe, Asia and North America respectively, with more than one third having less than US$1 billion in assets (11% had less than US$100 million), with the vast majority using outside investment managers to manage all or most of their assets.
The authors found that the percentage of respondents who had half or more of their assets 'reflecting ESG considerations' has increased every year since the first survey in 2022, to 35% today, with the highest results in Europe (45%) and lowest in North America (37%).
Interestingly, where in their portfolios ESG is applied was broader than expected. Almost everyone associates ESG investing with equities (stocks), and overall 36% of respondents said it is most material for 'listed equities'. However, 25% of respondents said it was most material for private equity and debt (which likely includes impact investing) and 24% for real estate, with just 14% saying bonds.
We’ve written elsewhere of the opportunities for faith-consistent investing in bonds, and expect this number to increase in the future.
Notable to us, as we hosted an entire Faith-Consistent Investing Interest Group on this topic in June 2024 and also in March 2023, the survey surfaced several 'barriers to pursuing an ESG investment strategy', with 'impact on returns' appearing at the top in ranked order:
We recently shared an observation with a faith-based asset owner that the first barrier 'impact on returns' should be crumbling under the weight of evidence, which may account for the decline in the 'fiduciary concerns' barrier, but this otherwise suggests the opposite, it has increased as a barrier.
While we’ve written on this in the past (example here), diligence and consistency is needed to address this overridingly important issue.
Finally, on active ownership (or company engagement, which we’ve written on extensively, including this recent post), the survey found that 60% of North American respondents found this work useful to changing company behaviour, while 21% in Europe found it 'not useful at all'.
The most important strategy in engagement was direct company interactions, followed by public policy actions. Interestingly, proxy voting was considered the least important method of active ownership. The message for us: proxy voting is not enough.
Many more interesting findings in the report’s 25 pages. For example, page 12 has a survey of issues respondents found most pressing to address, with company labour practices getting a big boost of attention. Also surveying the geopolitical risks of most concern, with the US presidential election, and Russia-Ukraine war receiving the highest number of 'very material to investing' responses.
Values are material to your organisation, and more material to broadly more peer investors. For those of you feeling pressure not to pursue values in investments, this report offers peer insights into how and where they are implemented, in portfolios, and through company engagements.