Institutional investors are moving away from standard environmental, social and governance factors, according to a new report by Morningstar Inc.
The report, which took responses from in-depth interviews with 25 investors around the world, found there’s an ongoing commitment to sustainability, but less interest in keeping ESG investments. Indeed, some investors are even combining social and governance into one lane.
“Fiduciary duty and practicality of purpose is driving more sophistication across all three of these factors when it comes to implementation, including developing specific strategies across different asset classes and creating strategies for alignment with their fund managers,” said the report.
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Asset owners are pursuing deeper sustainability efforts, such as deforestation, with a growing focus on recognizing biodiversity challenges as the systemic connection to climate-related risks, according to one anonymous representative at an undisclosed Canadian public pension plan included in the report.
Some investors don’t see portfolio decarbonization alone as being enough to address real-world emissions reduction, said the report, which noted new climate approaches and outlooks vary by asset owner and by market.
It also found investors are concerned about facing unprecedented global dynamics with a lot of uncertainty still present. These concerns include other domino effects beyond the financial impact to investors’ portfolios, according to an undisclosed U.S. public pension plan representative.
Asset owners are motivated by shifting geopolitics and public policy to balance short-term pressures with longer-term fiduciary commitments, noted the report, which is causing them to reconsider their asset mix, including allocations to the U.S. against non-U.S. assets while increasingly looking for private market opportunities.
Indeed, private markets are attractive for investors looking for more direct influence over company operations with fewer regulatory restrictions, it said. “It comes as no surprise that, with the growing interest in private equity investing across all global regions, asset owners are expressing a need for stronger and more comprehensive data on private companies and markets.”
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