According to asset manager, Capital Group’s fourth annual study global investors’ use of ESG, adoption remains at an all-time high of 90% globally and inches even higher in Europe, the Middle East and Africa (EMEA).
Key 2024 Capital Group Survey Results
Capital Group recently published its 4th annual ESG study of 1130 institutional investors. Survey participants included 565 global institutional investors (pension funds, family offices, insurance companies, sovereign wealth funds, endowments, foundations) and 565 global intermediaries (fund of funds, discretionary fund managers, private banks, wirehouse broker/dealers, registered investment advisors and independent advisory). These investors were based in 24 countries from Europe, the Middle East and Africa (EMEA) (50%), Asia-Pacific (32%) and North America (18%). Click here to download the 2024 Capital Group ESG Study.
Nine in ten (90%) of survey respondents identify as ESG users or adopters, defined as investors that view ESG as central to their investment approach, apply ESG or consider ESG issues in their investment approach. The remaining 10% of respondents identify as ESG non-users, which means they aren’t yet convinced about ESG, do not adopt or apply any ESG considerations in their investment approach and are unlikely to do so in the future.
Investors in EMEA were the leader, with 94% of respondents adopting ESG — up one percentage point from last year. ESG adoption rates in Asia-Pacific (93%) and North America (75%) are unchanged from last year.
This commitment to ESG stems from the need to ensure compliance with regulatory requirements (68%), followed by investors’ interest in managing financially material ESG risks (54%), and in finding ESG investment opportunities (50%). Nearly half (46%) of respondents see supporting the net zero transition as key to their ESG approach, up from 40% last year. The share of respondents that view advancing the United Nations Sustainable Development Goals (UN SDGs) as a key input in their ESG approach has also risen, to 41% from 34% last year.
Investors also believe that incorporating ESG in their investment process enhances their investment decisions. More than half (56%) say their approach to ESG is driven by a belief that adding non-financial factors to investment analysis improves decision-making. This rises to six in 10 (60%) among EMEA respondents. ESG fund performance stays both a hotly debated topic and a major obstacle for ESG adoption. More than 40% of respondents expect ESG funds to have similar returns against benchmarks/traditional funds, and fewer respondents (28%) have conviction in long-term outperformance.
More than 90% of respondents say they increased or maintained overall allocations to ESG funds over the preceding 12 months. Additionally, more than half of respondents plan to increase ESG allocations over the next 12 months, in part due to increased client demands.
Overall, just 7% of respondents trimmed ESG allocations over the past 12 months, and the same percentage plan to reduce allocations in the next 12 months. Investment performance (49%) and strategic asset allocation (46%) are the top two reasons for reductions by investors. In contrast, non-financial considerations featured less prominently in their decisions to trim ESG allocations, highlighting the importance of financial materiality when considering ESG implementation. For instance, only 23% of these investors cite non-financial performance (i.e., dissatisfaction with ESG outcomes) as the main reason to reduce allocations.
ESG data and analytics have improved over the years, but more than half of respondents (53%) still see consistency and reliability in ESG data as a significant challenge. One of the major challenges facing ESG adoption remains concerns with investment performance as 50% of survey respondents citing this as a significant issue.
Investors are mainly looking to address the data challenge of implementing ESG at their firms by accessing data from multiple sources (55%) and relying on the proprietary research of external managers (47%). Investors are also turning to technology for help as 28% are using advanced software tools to assimilate and standardize ESG data while 25% are using software tools to verify company ESG credentials.
Close to half of all survey participants plan to use AI in their analysis of ESG factors through the collection of data from diverse data sources (49%), while 43% plan to use AI in automating ESG reporting. 38% of survey participants plan to use AI in the validation process of ESG data.
Despite this fact, survey participants do believe that AI could have some profound ESG related risks. Data protection and privacy, cited by three-quarters (76%) of respondents, is seen as posing the most material AI-related ESG risk for investments. This reflects investors’ concerns over the fallout from data breaches and digital rights such as anonymity. AI’s transformative potential is powered by high electricity consumption. It should come as no surprise that more than half of respondents (54%) view energy consumption and greenhouse gas emissions from AI as a material ESG risk in investing over the next two to three years. About a quarter of respondents (26%) point to AI-induced pollution and e-waste issues as a key risk. The issue of labor rights/job displacement is viewed as another material social risk associated with AI by almost half of all survey respondents (49%).
Our Take
In varied ways, a majority of the more than 1,100 investors who participated in Capital Group’s 2024 ESG study believe that ESG factors are important when building a well-rounded and profitable investment approach. While ESG data reliability and concerns about poor investment performance remain huge challenges to global investors’ adoption of ESG, most firms see that the benefits of ESG outweigh the costs.
As is true for many investors at present, AI is a focus among respondents in Capital Group’s 2024 ESG study. It is clear that many survey participants are taking tentative steps to use AI as a tool to tackle ESG’s data challenges, hoping the new technology could help reduce operational complexity and costs. AI as an investment opportunity, however, has prompted greater deliberation of related ESG risks. Investors appear most concerned about data protection and privacy, energy consumption and rising greenhouse-gas emissions, and labor rights.
While regulatory demands are a major reason why most investors have implemented ESG into their asset management businesses, most feel that the use of non-financial factors like ESG will enable them to make better investment decisions. It is clear that ESG investing is here to stay.