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Callan survey shows growing recognition of ESG materiality with US institutional investors

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      By Anthony EamesDirector of Responsible Investment Strategy, Calvert Research and Management

      Boston - For the sixth consecutive year, the 2018 Callan survey of U.S. institutional asset owners found that foundations, endowments and public pension plans are more fully incorporating ESG factors into their investment decisions. In fact, it reports that more than 40% of U.S. asset owners incorporate environmental, social and governance (ESG) factors into their investment decisions, up from 37% in 2017 and 22% in 2013.1

      Foundations and endowment funds were the highest adopters of ESG by plan type. By plan asset size, large plans outpaced small plans, but ESG adoption is growing rapidly in smaller plans. The top reason cited for ESG inclusion was the expectation of an improved risk profile, according to 42% of respondents, up from 32% in 2017.

      On a regional basis, adoption rates were highest in the Pacific Northwest and the Northeast, with Southeast institutional investors the lowest ESG adopters.

      Calvert Blog 6-13-19a

      Key findings of the survey include:

      • In 2018, 64% of foundations reported incorporating ESG investing, up from 56% in 2017, followed by endowments at 56% (versus 39% in 2017).
      • Foundations have been the highest adopters of ESG investing in four out of six years that the survey has been conducted.
      • More than one-third (39%) of public funds incorporated ESG, up from 35% in 2017.
      • Adoption of ESG strategies fell in corporate retirement plans overall - reported as 20% in 2018, down from 25% in 2017. An increase in companies' use of defined contribution (DC) plans, which generally include fewer ESG options than do defined benefit (DB) plans, was the main reason given for the decline.
      • For large plans - those with more than $20 billion in assets - 72% reported incorporating ESG factors in 2018, down from 78% in 2017, but up from 33% in 2013, the first year the survey was conducted.
      • In contrast, 47% of funds with less than $500 million in assets said they incorporated ESG factors; this represents considerable growth, up from 30% in 2017 and 20% in 2013.

      Defined contribution market opportunities

      There was a significant difference between ESG adoption rates among DB and DC plans, according to the survey. Corporate DB plans incorporated ESG factors into the investment decision-making process at more than three times the rate (33%) of their DC counterparts (9%). Similarly, public DB plans utilized ESG factors at more than twice the rate (43%) of their DC counterparts (20%).

      Top reasons for including ESG factors

      Along with an improved risk profile, top reasons cited for including ESG in their investment decision-making were fiduciary responsibility and goals other than risk-adjusted returns.

      Calvert Blog 6-13-19b

      The top reasons for not incorporating ESG factors were that the plan does not consider factors that are not purely financial, according to 52% of respondents, up from 41% in 2017, followed by lack of research tying ESG to outperformance and an unclear value proposition.

      With ESG an uptrend for the third year in a row, it appears to be a trend that is here to stay with U.S. plan sponsors. As headway is made in aligning ESG investment metrics with clear, measurable performance and other material outcomes - including with the U.N. Sustainable Development Goals (SDGs) - we expect to see ever-greater demand for ESG strategies.

      Bottom line: As headway is made in aligning ESG metrics with clear, measurable performance and other material outcomes - including with the U.N. Sustainable Development Goals (SDGs) - we expect to see ever-greater demand for ESG strategies among institutional investors.