Institutional Investor ESG Survey Report
Global consulting firm Millani released an ESG survey report on institutional investors, surveying 40 Canadian asset managers and asset owners, involving assets exceeding 5.8 trillion Canadian dollars.
Millani found that while factors such as interest rates, inflation and market volatility had an essential impact on institutional investors in the first half of the year, they were still interested in implementing ESG investments and responding positively to regulators’ policies. In terms of ESG themes, climate change (98%) takes the top spot, followed by equity, diversity and inclusion (45%) and human capital (45%). Biodiversity (38%) takes third place.
Is ESG Investing Facing Headwinds?
While ESG investing faces investor pressure in some economies, only 11% of respondents expressed this concern. Respondents said these headwinds represent a need for a clearer ESG classification in the market and push institutional investors to use a more inclusive approach to ESG integration in asset allocation. ESG investing is not the same as impact investing and needs to be more clearly defined.
What is the Impact of Regulations?
Although regulatory policies play an important role in regulating ESG investing, some respondents believe that current regulatory policies have had a negative impact. Institutional investors need a lot of time to meet compliance requirements, instead of focusing on the real purpose of these policies. In particular, investors operating across borders usually face the disclosure policies of different jurisdictions, which makes ESG investment need to bear additional costs.
25% of the respondents said that SFDR is the most influential regulation in the past year, and many funds have been classified according to Article 8 and Article 9. At the same time, the two ISSB guidelines released in the second quarter of this year will also reduce the burden on institutional investors in terms of financial disclosure.
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Is an ESG taxonomy necessary?
In the roadmap of the Sustainable Finance Action Council (SFAC), the ESG taxonomy has become the focus. This taxonomy hopes to accelerate climate change-related asset allocation. Achieving net zero requires 125 billion to 140 billion in annual climate financing, but currently there is only 15 billion to 25 billion.
The overwhelming majority of respondents also favored taxonomy, with 36% having already begun designing a unique taxonomy at company level. Asset management companies believe that taxonomy can motivate investors to recognize the value of ESG investments and provide efficient allocation of funds.
Are Transitional Investments Worth Considering?
Transitional investments and transitional products are integral to the pursuit of net zero. Respondents believe that demand for these products continues, but supply remains insufficient. This undersupply is related to the lack of taxonomy, as well as the gaps in some companies’ disclosures.
Respondents indicated that while investors are more interested in transitional products, they also consider the investment return. Institutional investors need to have a transition plan in these offerings on a regular basis.
How to consider the sustainable outcome?
Beyond traditional risk and return, 50% of respondents are also starting to consider sustainable outcomes from investments. However, the market has yet to agree on the definition of a sustainable outcome. Controversy from greenwashing have also made it difficult for institutional investors to weigh these results.
To avoid the problem of double counting, some respondents began to use double materiality to measure sustainable results. This method not only considers the impact of ESG from a financial perspective, but also considers the impact of investees on ESG, and its application may continue to expand in the future.
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