What’s the “big money” thinking? Indeed, that’s a question often asked by investors trying to read the direction of global markets and form their own approach.
One form of “big money” is the largest asset owners (AOs) – pension funds, foundations, endowments, and sovereign wealth funds.
The size of this group often gives them outsize influence. In fact, according to recent research from Willis Towers Watson’s Thinking Ahead Institute, over $23 trillion was concentrated with the top 100 asset owners at the end of 2020, making this potentially one of the most influential group of investors on the planet!
Their investment policy statements codify their views and are often a marker for emerging best practices among asset managers and other fiduciaries. Nowhere is this more evident than in ESG investment.
To learn more about the motivations and practices of AOs, Morningstar Indexes and Morningstar Sustainalytics initiated its first annual Voice of the Asset Owner Survey in March 2022.
The survey is divided into two phases: a qualitative phase based on in-depth interviews with a limited number of AOs, just completed, to be followed up by a quantitative survey of 250+ global AOs.
The qualitative findings help us take the temperature in the room, so-to-speak, and provide a foundation for the topics and questions in the quantitative survey slated to hit the field in July and August.
Morningstar partnered with Opinium Research and Collie ESG to interview 14 AOs, nine in Europe and the UK and five in North America.
The conversations brought to the survey an appreciation of AOs’ commitment to ESG investment, the complexity of the issues they seek to address, and the challenges of implementation in an investment context.
The influence of asset owners
As fiduciaries, AOs share similar objectives; ensure long-term capital preservation and on-going payouts while navigating the uncertainty of market cycles and global events such as the Covid-19 pandemic and ramifications of the war in Ukraine.
At the same time, they are diverse entities, with different missions, stakeholders and fiduciary obligations. One important commonality; new investment practices honed by AOs are often adopted by wealth managers and retail investors.
The sheer size of funds like the Japan’s Government Pension Investment Fund, Norwegian Government Pension Fund Global or CalSTRS necessitates that they are broadly diversified across markets and asset classes.
As universal owners, these institutions are so widely invested in the markets that they cannot diversify away externalities associated with systemic risks.
Hence, many have embraced ESG to mitigate system-wide risks like climate change. They can’t afford to sit back and watch while ESG policies, procedures and approaches emerge; they often need to take the lead.
Findings
So, what is the “big money” thinking? Our structured interviews fell into four key areas: investment policy and ESG, implementation, regulation, and ratings, data and tools.
We learned that ESG is mainstream, material and multi-faceted. AOs told us that their ESG policies are driven by a combination of investment conviction, desire for achieving positive impact and stakeholder demand.
There was broad consensus among the interviewees that ESG factors are financially material and have the potential to enhance their investments. They also expressed the view that ESG addresses complicated issues so there are no easy answers.
Putting ESG policy into practice is a challenge for asset owners, partly attributable to the fact that many AOs outsource some or all their investment management responsibilities.
But its AOs universally agreed that engagement is critical to their ability to influence corporate behavior, whether unilaterally or collectively through organizations like Climate Action 100+ or the Institutional Investor Group on Climate Change (IIGCC).
Regulation of ESG-related activities, particularly in Europe, has become de rigueur in recent years and appears to be making headway in the US with initiatives to improve disclosure by corporations and fund managers and to counter greenwashing concerns.
While most pertinent to asset managers, these new regulations may affect AO assets managed externally.
ESG investing has called forth an industry that provides specialized data and analysis necessary for the integration of ESG data into the investment process.
While AOs recognize that the data and analysis are better than ever, they nevertheless find them wanting. Uncorrelated ratings and the use of dated information are among the concerns mentioned.
What does this tell us?
The picture that emerges from the first phase of the survey is simultaneously one of progress and challenges. Perhaps most importantly, while most AOs cited barriers, not one signaled a retreat from their ESG commitments.
Reading between the lines, these investors understand that ESG is intended to address complex, interconnected problems that are not amenable to simple solutions – “wicked problems” in the parlance of social science. [Crowley, Kate & Head, Brian. (2017).
The enduring challenge of ‘wicked problems’: revisiting Rittel and Webber. Policy Sciences.
For them, resolving systems-level risks associated with climate change, diversity and equity, and biodiversity is not optional. Ignoring them will not make them go away – as investment risks or as problems for the world their stakeholders inhabit.
We anticipate deeper insights into these issues from the next phase of the Voice of the Asset Owner survey.
See you in September, when we hope to share results from our broader quantitative global survey where we’ll test these and other initial observations with a much larger sample size.
Tom Kuh is head of ESG strategy at Morningstar Indexes.