Incorporating environmental, social, and governance (ESG) principles into portfolios is a high priority for asset managers, and asset owners are increasingly influencing the companies in which they invest by working with their asset manager partners to align their proxy votes with their organization’s values and principals, according to a recent report.

As well, several asset owners have sought to use their investment portfolios to offset their carbon footprints by investing in technologies like carbon recapture, states the report issued by Cerulli Associates and sponsored by Russell Investments that surveyed 20 leading institutional asset owners and managers in the third quarter of 2021.

In general, asset managers are incorporating more environmental themes into their ESG process with climate change or carbon (90%), energy efficiency (85%) and pollution (79%) cited as their top priorities.

Asset owners, the report notes, often rely on their intermediaries – investment consultants and outsourced chief investment officers – to provide guidance. “Intermediaries play a pivotal role in the integration of ESG factors,” says James Tamposi, a senior analyst at Cerulli. “Investment consultants are charged with helping asset owners implement ESG considerations and opportunities and regularly collaborate with their asset owner clients.”

Asset managers with a presence in Europe say demand from European clients often drives the evolution of their ESG capabilities. These managers say Europe is ahead of the US and other markets in sustainable investing, and the influence of regulators in these regions further amplifies their rate of adoption. This trend is especially pronounced when it comes to climate change.

While asset owners and managers are committed to incorporating climate considerations, they are challenged by multiple sources of conflicting data and gaps in available data. Both asset owners and managers struggle with sourcing, aggregating, and interpreting data from the universe of climate data providers.

“It is perhaps the most critical challenge facing the industry,” Tamposi explains. “Data sourcing, compounded by a lack of reporting disclosures, makes it especially difficult for investors looking to build a framework, particularly for US holdings.”

As asset owners and managers continue to streamline their processes, they are likely asking US companies for the same metrics European companies are required to disclose, providing an avenue for global standardization, according to the report.

Looking forward, allocating resources to implement climate investing is top-of-mind for both asset owners and managers. Rather than simply having their investment teams adopt a new investing lens, several managers have hired heads of ESG or ESG specialists to assist in developing frameworks and ultimately integrating ESG policies into their overall investment approach.

“Implementing a climate investing lens or ESG more broadly is a complex process that takes time,” Tamposi notes. “No matter where they are in terms of progress towards incorporating these initiatives, asset owners and managers anticipate their approaches will continue to evolve over time.”