For the past two years, ESG has fallen out of favor among U.S. allocators. The rest of the world? Not so much.
Considering investments based on environmental, social and governance factors has become politicized, leading to state legislation banning the practice, lawsuits, and reputation concerns, so U.S. allocators are pulling away from it. Those in Europe, Canada, and Asia, by comparison, are forging ahead.
Coalition Greenwich is putting numbers to the trend, with new research released Tuesday. The research firm surveyed 310 institutional investors globally in 2023, revealing just how wide the chasm is between U.S. allocators and their global counterparts.
The survey showed that 32 percent of U.S. institutional investors use ESG considerations in their portfolios. Canadian institutions are more aligned with global investors, with 53 percent employing ESG in their investment process. Indeed, 94 percent of European respondents have incorporated ESG into their investment process in some capacity. Within Asia, that portion is 86 percent.
“While the process of ESG adoption continues in Europe and Asia, institutional investors in the United States are at an inflection point,” Mark Buckley, global head of investment management at Coalition Greenwich, said in a statement.
It’s important to note why this divergence is taking place. In the U.S., state legislatures have taken up the ESG issue as a matter of fiduciary duty. Those in conservative states say that considering ESG factors would be a violation of fiduciary duty, the notion that an allocator must act solely in the best interest of their clients or beneficiaries.
“At the root of the growing divergence between the U.S. and the rest of the world are differing perspectives on the role and definition of fiduciary responsibility,” Buckley said in a statement. “In addition, both asset owners and investment managers in the U.S. could be slowing their adoption of ESG in the face of delayed ESG rulemaking by the SEC and a muddled ESG legislative environment.”
“Institutions are asking their asset managers for proof of both their commitment to and effectiveness in stewardship,” said Christopher Dunn, head of investment management, continental Europe at Coalition Greenwich. “This can include annual stewardship reports, case studies and proxy voting records.”
For those that are implementing ESG considerations into their investments, most of the survey respondents favor a stewardship approach. This involves actively engaging with companies to improve their ESG outcomes. Most of those institutions — 59 percent — want to receive annual stewardship reports that show the work they are doing on this issue. Proxy voting records, case studies, and third-party evaluations of managers are also of interest, according to the survey.
In Asia, excluding Japan, 85 percent of institutions require prospective managers to provide an ESG policy statement and documentation of the ESG work they are doing. In other areas, aside from the U.S., the majority of investors surveyed (around 70 percent, give or take depending on the region), require these policy statements.
According to Coalition Greenwich, European investors want more than just ESG policy statements, they want consistency. They look to ensure that ESG is consistent globally when assessing the statements, the survey showed. Stateside, just 33 percent of institutions are asking their managers for detailed policies on ESG. In Europe, regulators already force companies to disclose a standardized climate impact report about their operations and the SEC voted to approve similar new rules last week.
ESG benchmarking is another area of divergence. Only 6 percent of U.S. investors said they would expect managers running ESG funds to use an ESG benchmark, rather than a traditional one, to measure performance. In Canada, meanwhile, 83 percent of allocators will ask that of their managers.
