Institutional Investors Look for Answers as Questions Around ESG Mount, Schroders Study Finds

2022 promises to be a pivotal year in the lifecycle of ESG investing – one defined by the maturing and mainstreaming of ESG as an investment discipline. Today, global asset manager Schroders released the findings of the Institutional Investor Study, which uncovered investors’ sentiment around this hotly debated area.

Schroders annual study, first launched in 2017, surveyed 770 institutional investors with $27.5 trillion in assets to gauge their pulse on the biggest global investment trends and how they are reacting to them.

In previous years, strong performance drove ESG investment interest and appetite. For example, as of December 31, 2021, money managers reported $28.03 trillion in global assets managed under ESG principles. This figure was up 21.9% from the year before (2020), and five years before that (2016), up 415%(1). However, as interest rates, inflation, and energy markets rise, and “ESG friendly” expensive growth stocks sell off, investors are being forced to re-assess and re-define ESG investment for themselves. This recalibration has brought questions surrounding performance, ESG data comparability and investment tactics to the top of U.S. investors’ minds.

Performance concerns persist

To U.S. investors, questions around sustainable investment performance continue to circulate. Fifty eight percent of U.S. institutional investors noted performance concerns as a hinderance for investing sustainably, compared to 53% of their global counterparts.

Further, 70% of respondents noted evidence of improved financial performance is important or very important to them when investing sustainably. Another 59% have stated that more clarity around the different sustainable investment options which are available to them is important, demonstrating the need for the asset management industry to provide clear education surrounding ESG offerings.

Investor calls are clear – Comparable data, increased transparency and better reporting are needed

Sixty five percent of U.S. investors still find it somewhat or very challenging to invest sustainably – a figure remaining essentially unchanged from previous years (64% in 2021, 66% in 2020), despite increased adoption of ESG.

In particular, this year’s survey identifies a strong need for quantitative evidence and data to support investors’ comfort with committing to ESG investing. Specifically, over half of investors (51%) noted the lack of transparency and reported data as a challenge to investing in sustainable solutions. To support investors’ exploration and adoption of sustainable investing practices, it is imperative that transparent and comparable data is widely available and broadly understandable.

Additionally, the study found:

• When asked what would encourage greater investment in sustainable strategies, 68% were hoping to access more quantitative evidence about the financial considerations of investing sustainably.
• Fifty nine percent of investors responded that enhanced reporting and transparency from asset managers is very important to them when investing sustainably.
• Consistent and comparable data points across managers also ranked highly, with nearly three quarters of respondents (70%) emphasizing this as important or very important when investing sustainably.
• Regarding the biggest challenges with investing sustainably, 47% of respondents identified the lack of consistency with disclosures and reporting frameworks as a key issue and 43% of respondents noted greenwashing, due to a lack of clear, agreed definitions on what sustainable investment is, as an additional problem.

To further inform sustainable investing decisions, investors are relying on existing market information, such as reporting by third parties, like MSCI and Sustainalytics (48%) or historical performance data (47%).

ESG integration as the method of choice

For those looking to invest sustainably, ESG integration is the preferred approach, with 63% of respondents selecting this as their top choice. This was followed by positive screening (focusing on ‘best in class’ companies and investments) at 60%. At the same time, investors report that they are prepared to scrutinize how their investments impact the environment and society, and increasingly want to quantify and account for those impacts.

When considering the various sustainable investment opportunities, 66% of respondents indicated they would like to invest in funds or solutions that focus primarily on delivering financial returns while broadly integrating ESG factors. This is notably higher than the global average of 58%.

As Americans continue to expect more from corporate actors, institutional investors are also responding with an emphasis on active ownership. This year, institutional investors placed greater importance on active ownership with 35% ranking this as important or very important, compared to 29% in 2021.

Marina Severinovsky, Head of Sustainability, North America, commented:

“As the performance of naïve, passive ESG strategies falters and the regulators circle the wagons, sustainable investing is at a critical juncture. Investors are clear that they need more quantifiable evidence of the value and impact of ESG, and more clarity and transparency into how this investing is practiced and measured.

At Schroders, we have always set a high bar with our internal definitions, and with ensuring that we can provide evidence and robust reporting on our efforts, via our proprietary tools like SustainEx for impact measurement. We welcome the next stage of the ESG investing lifecycle where industry consistency leads to deeper investor understanding.”

About Schroders Institutional Investor Study:

Schroders commissioned CoreData to conduct the sixth Institutional Investor Study to analyze the world’s largest investors’ key areas of focus and concern including the macroeconomic and geopolitical climate, return expectations, asset allocation and attitudes to private assets and sustainable investing.

The respondents (770 globally ) represent a spectrum of institutions including corporate and public pension plans, insurance companies, official institutions, private banks, endowments and foundations, collectively responsible for US$27.5 trillion in assets. The research was carried out via an extensive global survey during March 2022.

(1) Source: Pensions & Investments

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Schroders plc

Founded in 1804, Schroders is one of Europe’s largest independent investment management firms by assets under management. As at 31 December 2021, assets under management were £731.6 billion (€871.3 billion; $990.9 billion). The founding family remain a core shareholder, holding approximately 48% of the firm’s voting shares. Schroders has continued to deliver strong financial results. It has a market capitalization of over £8 billion and employs over 5,500 people across 37 locations.

Schroders has benefited from the most diverse business model of any UK asset manager by geography, by asset class and by client type. Schroders offers innovative products and solutions across their five business areas of solutions; institutional; mutual funds; private assets & alternatives; and wealth management. Clients include insurance companies, pension schemes, sovereign wealth funds, endowments and foundations. They also manage assets for end clients as part of their relationships with distributors, financial advisers and online platforms. Schroders’ Wealth Management offering reflects their strategic ambition to provide wealth management and financial planning services to clients across the wealth spectrum.

Schroders’ strategic aims are to grow the asset management business, build closer relationships with end clients and expand their private assets and alternatives business. Schroders’ purpose is to provide excellent investment performance to clients through active management. The business channels capital into sustainable and durable businesses to accelerate positive change in the world. Schroders’ business philosophy is based on the belief that if we deliver for clients, we deliver for Shareholders and other stakeholders.

Important Information: All investments involve risk, including the loss of principal. The views and opinions stated are those of the individuals quoted and are subject to change. This document does not purport to provide investment advice and the information contained is for informational purposes and not to engage in any trading activities. Reliance should not be placed on the views and information in the document when making individual investment and/or strategic decisions. The material is not intended to provide, and should not be relied on for accounting, legal or tax advice, or investment recommendations. Schroder Investment Management North America Inc. (“SIMNA Inc.”) is registered as an investment adviser with the US Securities and Exchange Commission and as a Portfolio Manager with the securities regulatory authorities in Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec and Saskatchewan. It provides asset management products and services to clients in the United States and Canada. Schroder Fund Advisors LLC (“SFA”) markets certain investment vehicles for which SIMNA Inc. is an investment adviser. SFA is a wholly-owned subsidiary of SIMNA Inc. and is registered as a limited purpose broker-dealer with the Financial Industry Regulatory Authority and as an Exempt Market Dealer with the securities regulatory authorities in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Quebec, and Saskatchewan. SIMNA Inc. and SFA are wholly-owned subsidiaries of Schroders plc, a UK public company with shares listed on the London Stock Exchange. Further information about Schroders can be found at www.schroders.com/us or www.schroders.com/ca.

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