Institutional investors willing to ditch holdings over poor ESG

Many institutional investors are looking to divest from companies that aren’t considering environmental, social and governance (ESG) factors.

Seventy-four percent of respondents to the 2021 EY Global Institutional Investor Survey indicated that a holding’s poor ESG track record would make them more likely to consider divestment. The EY report also noted that the vast majority (78%) of investors polled said they conduct “a structured and methodical evaluation of ESG disclosures,” up from only 32% in 2018.

The factor driving the rising interest in addressing ESG risk in the institutional space was the pandemic, with the report noting it’s been “a wake-up call for the world, showing the devastating consequences of major systemic risks.”

The report added that “the parallels between the risks of a pandemic and issues such as climate change have highlighted how important ESG-informed investing can be.”

The data backs this up: Ninety percent of investors polled said greater importance has been attached to the ESG performance of corporations, while 86% said such performance directly impacts their portfolio recommendations.

Further, 92% said they have made decisions over the past 12 months based on the potential benefits of a “green recovery.”

However, many of the professionals polled hadn’t updated their investment policies to account for ESG or had not implemented ESG criteria across all portfolios. In the wealth and asset management space, the respective percentages were 50% and 48%, similar to the results in banking and capital markets (50% and 55%) and insurance (45% and 47%).

One reason for this hesitancy was concern about the “transparency and quality” of ESG disclosures by companies. Half of institutional investors (up from 37% in 2020) indicated “a lack of focus on material issues” in such disclosures.

To assess the credibility of companies’ alleged ESG measures, investment professionals said they look at whether key members like chief sustainability officers report directly to top management (53%) and whether reporting from companies is assessed by third parties that are held to international standards (48%), among other steps.

To that end, 89% of institutional investors called for mandatory global standards for ESG reporting. (The survey was conducted before the CFA Institute released its voluntary disclosure standards.)

“Although there are clear intentions to look more closely at ESG risks across portfolios and investment targets in the future, institutional investors have been relatively slow to make concrete changes to the way they operate,” said Thibaut Millet, EY Canada’s climate change and sustainability services leader, in a release.

While Millet noted the importance of “quality non-financial disclosures and a clearer regulatory landscape,” he also stressed that firms must take “bolder steps” in their investment decision-making instead of waiting.

The survey of 324 senior decision-makers from around the world was conducted in partnership with Longitude Research between June and July 2021. The financial services and business services sectors were most heavily represented (41% and 28%, respectively).

Read the full study.