Sustainable investment is now standard and its regulation is viewed positively by global asset owners, who see risk management as the key reason fuelling their investment appetite in this area and climate and carbon as their leading priorities, according to a recent report

“Looking back at data from previous years, sustainable investment has clearly gained momentum among asset owners,” states the FTSE Russell annual report, which surveyed global asset owners. Over eight in ten (84%) asset owners globally, the report finds, are implementing or evaluating sustainable investment considerations in 2021, up from a little over half (53%) in 2018.

In the Europe, Middle East and Africa (EMEA) region, sustainable investment evaluation and adoption by asset owners is nearly universal (97%), up from the 85% in 2020 and 72% in 2018. The report’s figures for North America also show an increase from 39% in 2018 to 68% in 2021.

Asset owners that are implementing and evaluating sustainable investment are motivated by risk management, with almost two-thirds (64%) of all asset owners noting that mitigating long-term investment risk is a key factor. There is a correlation between size and a heightened focus on risk: 70% of respondents with assets under administration (AUM) of US$1 billion or more cite this reason, compared with just 42% of asset owners with AUM of less than US$1 billion.

Moreover, not allocating to sustainability-focused investments is perceived to come with a risk to institutional reputation. Nearly half (49%) of asset owners in North America implement sustainable investment strategies to avoid harming their institution’s reputation while 60% in EMEA and 64% in Asia-Pacific choose this reason.

Regional differences

Examining the regional data, differences of opinion exist. In EMEA and Asia-Pacific, the priority focus area is climate and carbon, with over two-thirds of asset owners focused on this area (77% and 68%, respectively). In North America, the focus is strongest on social themes (62%), followed by governance (58%) and climate and carbon (56%).

Asset owners in different regions also express diverging opinions on the investment impact of climate risk. Rating their sentiments on a zero-to-ten scale, over half of asset owners in EMEA and Asia-Pacific are very concerned (8, 9 and 10). In contrast, less than 30% of North American asset owners expressed this level of concern, with one-third of US asset owners stating they were not concerned or not very concerned about the investment impact of climate risk (0, 1 and 2).

As the Covid-19 pandemic spread in mid-2020, many social issues intensified in communities and in the media around the world. Of all asset owners, 60% say that social themes – including diversity and inclusion, human rights, customer responsibility and social impact – are a sustainability priority focus. Among the 40% of respondents that do not view this as a current priority focus, over half say that they would prioritise social themes if social data were reliable and widely available.

Regulation benefits

Asset owners worldwide have mixed views about how supportive regulation is in the financial services industry at large, but tend to have a more positive view in the context of sustainable investment. Of those surveyed, 82% view sustainable investment regulation as enabling or potentially enabling adoption of sustainable investment depending on the specifics of the regulation, while only 15% view this regulation as exclusively constraining.

For those asset owners that agree with the potentially enabling benefits of regulation, over three-quarters (78%) say that regulations may improve the quality and consistency of corporate reporting and disclosures.

In Europe where sustainable investment strategies have been most widely implemented, 93% of asset owners see regulation as enabling or potentially enabling. However, the majority (60%) of them say the regional inconsistencies across regulation of sustainable investment and environmental, social and governance (ESG) issues are a cause for concern.

With the rise of corporate ESG and climate-reporting requirements, asset owners say that there are notable benefits to investors of improved reporting and standardisation: 61% say that the development of corporate ESG and climate-reporting requirements are beneficial to their institutions’ investment approaches.