Over two thirds of asset owners report that ESG has become more material to their investment process, as a greater share of assets is being invested in strategies that take ESG factors into account and asset owners increasingly set up dedicated ESG teams, according to a new survey released by investment research firm Morningstar.

For the report, Voice of the Asset Owner Survey 2024, Morningstar Indexes and Morningstar Sustainalytics surveyed 500 asset owners across North America, Europe and AIPAC, representing $18 trillion of assets under management (AUM), including pension funds, insurance general accounts, outsourced CIOs (OCIOs) and family offices.

The survey found that 67% of asset owners believe that ESG has become more material over the past five years, including 23% who report that it has become “much more” material, and only 13% reporting that ESG has become less material to their investment process. By region, APAC investment owners were the most likely to report an increase in ESG materiality at 71%, followed by European asset owners at 68%, and North Americans at 61%.

By “E,” “S,” and “G” categories, more than half of assets owners believe that each has become more material over the past year alone, including 64% reporting an increase in materiality for environmental factors, up from 52% last year, 58% reporting an increase in materiality for social factors, compared with only 38% last year, and 55% for social factors, up from 43% last year.

Within each of the major categories, the survey found that asset owners view the transition to net zero emissions as the most material Environmental factor to their investment decisions, cited by 55% of respondents within the top 5 factors, followed by energy management at 49%. Labor practices jumped to the top spot among Social factors to 51%, rising from less than 40% last year, as Diversity and Inclusion fell significantly to approximately 40% from 57% in 2023, while business ethics topped the materiality list for Governance factors at 54%, up significantly from 40% last year.

As asset owners see increased ESG materiality, the survey also found that they are increasing allocations accordingly, with respondents reporting an average of 42% of AUM allocated to strategies that take ESG factors into consideration, up from 41% in 2023 and 38% in 2022. Similarly, 35% of asset owners reported that more than half of their AUM are in strategies with ESG considerations applied, up from 34% in 2023 and 29% in 2022.

Additionally, the survey found that asset owners are increasingly looking internally to manage ESG initiatives, with 50% reporting relying most on “internal resources” in the operation of their ESG programs, up from 45% in 2023, and 22% reporting having an internal ESG team, up from only 15% last year.

The survey also found that most asset owners view active ownership as useful in driving the implementation of their ESG program, with 54% reporting it as somewhat or very useful. By method of active ownership, direct engagement was ranked top in order of importance, with proxy voting viewed as the least important.

Thomas Kuh, Head of ESG Strategy, Morningstar Indexes, said:

“ESG materiality, still strong, is broadening and deepening while fiduciary duty continues to be driven by financial materiality. In addition, active ownership is alive and well, with direct engagement considered the most impactful tactic.”

Examining the top drivers for ESG consideration, the survey found that asset owners reported senior management/leadership most often as a top 3 rationale for considering ESG in the investment process, at 36%, consistent with the prior year, followed by local regulations and regulators at 30%, and stakeholder pressure at 29%. Top barriers to pursuing and ESG investment strategy included impact on returns at 44%, followed by a lack of standardized data, rising by 9 percentage points over the past year to 39%.

The report also assessed the key tools used by asset owners in implementing an ESG strategy, with 43% reporting ESG data as the most important component, followed by ESG ratings at 24%, and ESG indexes at 23%.

Notably, most asset owners believe that each of these tools have been improving, with 62% reporting that ESG data has gotten better over the past five years, 55% reporting improvement in ESG ratings, and 54% in ESG indexes. The top areas requiring improvement included “more accurate data,” “more standardized reporting,” and “more relevant reporting,” each cited by more than 40% of asset owners.

The survey also found that asset owners are optimistic about the potential for artificial intelligence to support their ESG investing processes, including 82% reporting hoping that AI adoption will increase to help with data collection, 77% for ESG reporting, and 71% for ESG analysis.

Paul Schutzman, Head of Institutional Solutions for Morningstar, said:

“As stewards of influential pools of global capital, asset owners take their fiduciary duties very seriously, and our survey findings underscore that. Notably, asset owners are asking for more granular ESG data to help support a broad range of ESG-related challenges.”

Click here to access the survey.