Morningstar Indexes has conducted a survey of significant asset owners, with Thomas Kuh, Head of ESG Strategy for Morningstar Indexes, commenting on the investment insights that can be drawn from the findings. The survey revealed that the ongoing political campaign in the US to ‘cancel’ ESG investment approaches is among the issues on the minds of asset owners.
“2022 was a bad year in the markets for everybody but the evidence shows net inflows for ESG funds globally,” he says.
The qualitative study gives voice to global asset owners allowing Morningstar to use the findings for guidance on a future quantitative survey, expected in September.
Assessing the macro environment in which the asset owners work, the findings were that instability and uncertainty have become the “New Normal”.
The study asked asset owners about their current investment strategy and what influenced their outlook over the last year.
“Major destabilising influences on the global economy that were viewed as threats a year ago – specifically the war in Ukraine and its impact on energy markets – have now become normalised in their eyes,” Kuh says.
“While recent events that have diminished confidence in the US banking sector have asset owners concerned, the war in Ukraine has faded into the background. Investors are learning to live with higher inflation levels and its impact on investing and are closely monitoring monetary policy. Interestingly, inflation has become a concern with some pension plan managers to the extent it is putting pressure on beneficiaries’ ability to meet their financial needs.
“China is also an area of concern, particularly given geopolitical developments over the last year and the fact that it is such a large part of the global economy. Yet despite all these factors, asset owners are finding places to constructively deploy their capital this year.”
The head of investments for a USD3.5 billion EMEA-based DC Master Trust commented: “We have been seeing the impact of the rising cost of living across the UK manifest in an increased number of members taking their retirement benefits compared to years prior to 2022. Younger members have made fewer changes to their savings rates despite rising energy and housing costs. We are mindful of these strains and have recently spoken with members about balancing competing short-term strains and long-term pension savings.”
The political atmosphere was also commented on. “When talking about the ‘noise’ coming out of some states recently that are quick to criticise ESG, the fundamental flaw is that they don’t see ESG issues as investment issues. There are plenty of environmental, social and governance issues that are investment issues, and if they are, they should be considered,” says one MD on the Investment Team for a USD18.5 billion Religious Pension Fund.
“I think what the entire industry struggles with is standardisation of data but then also access to complete data or decision-useful data itself. That is certainly something that needs to improve and will continue to be a focus as it relates to evaluating each company. It certainly needs to improve and evolve but we are making progress as we go,” says the Chief Investment Officer of a USD64 billion US State Pension Fund.
The survey reports that asset owners acknowledge that ESG data and analysis continue to improve, but they are still looking for better data and tools for use in decision making – a desire they voiced in last year’s survey as well.
“They recognise that “ESG” does not mean the same thing to everyone and the data currently available doesn’t make it easy to consistently measure it. AOs interviewed agree that better internal portfolio tools and external metrics would help them more effectively deal with rapidly increasing regulatory reporting demands. While they continue to invest resources to develop in-house ESG expertise, they appreciate contributions of, and challenges facing, ESG research providers,” the survey says.
“I’m probably less concerned than I was about five years ago about the volume of products. I’m probably more concerned about the quality of those products… Most of the ESG tools are very equity-heavy; it is really hard to have a portfolio-wide view, or to have even an asset class view of any kind of ESG risks, opportunities or broader themes beyond equity,” says one Portfolio Manager of a USD20 billion Australia-based Superfund.
Morningstar’s conclusions from the survey which will be tested in the upcoming global quantitative survey include:
Has the global investment landscape become more favourable for asset owners in 2023, or are there still major concerns – such as geopolitical instability and inflation – lurking below the surface?
How are asset owners viewing impact relative to financial materiality when implementing ESG-oriented investment approaches? Is impact just a “nice to have” or is it beginning to have more weight in investment decisions?
Climate is clearly “king” when it comes to ESG, but how is the dialogue, scope and investment approach around climate broadening and deepening as asset owners become more sophisticated and nuanced?
Are service providers, like asset managers, data and index providers, keeping up with the needs of asset owners, or is the gap between need and available product still too wide?