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Global Investors Accelerate ESG Investments in Response to Pandemic, According to MSCI Survey; Interconnected Risks Present Challenges

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The global pandemic has highlighted both the importance of ESG issues and is accelerating ESG integration by institutional investors, according to the respondents of MSCI’s 2021 Global Institutional Investor Survey1, a survey of 200 asset owner institutions with assets totaling approximately $18 trillion.

The survey of sovereign wealth funds, insurers, endowments/foundations, and pension funds found that over three-quarters (77%) of investors increased ESG investments “significantly” or “moderately” in response to COVID-19, with this figure rising to 90% for the largest institutions (over $200 billion of assets).

“The combination of climate-related events, such as devastating wildfires, floods and droughts, and a global pandemic have accelerated the paradigm shift on ESG and climate change. Once an issue for ‘green funds’ and side-pockets, ESG and Climate are now firmly established as high priority issues,” said Baer Pettit, President and Chief Operating Officer, MSCI. “2020 marked a profound shift in the way institutions invest as many investors have recognized that many companies with strong environmental, social and governance practices outperformed during the pandemic.”

The survey reveals that while U.S. investors in general have been lukewarm about ESG in the past, with some high-profile exceptions, 2020 dramatically shifted their views closer to those of their international counterparts. Of U.S. respondents, 78% said they said they would increase ESG investment either significantly or moderately as a response to COVID-19, while the figure was 79% and 68% in Asia-Pacific and EMEA, respectively.

When exploring future ESG investments, investors said they are putting greater emphasis on the “S” in ESG, with over a third (36%) wanting “Social” to comprise a larger proportion of the mix in 2021. This increases to 50% and 48% in the U.K. and U.S. respectively, where respondents cited COVID-19 coinciding with a reassessment of inequality in society as a driving factor.

Myriad challenges - climate change the major risk

While institutional investors are transforming their investment processes to reflect today’s imperatives, they are facing a long list of challenges over the medium- and long-term, with nuances depending on size, location, and long-term investing goals.

Although the survey revealed global differences, for many investors ESG challenges are a top concern. Almost a third (31%) of institutional investors with over $200 billion of assets said climate risk will have the greatest impact on the way the organization invests over the next three to five years. This was followed by disruptive technologies, such as artificial intelligence for almost a fifth (19%) of investors, while 14% believe increasing sophistication of ESG measurement will have the greatest impact. On the other hand, smaller investors (less than $25 billion of assets) said increasing regulations and market volatility are the major trends that will impact their investments over the next three to five years.

Climate data at the center of managing global risk

Due to the range of global challenges investors are facing, the survey found that respondents perceived risk as more important than traditional asset allocation, with investors of all sizes believing the diversity of risk sources was more relevant than asset allocation in achieving investment excellence.

With climate change cited as one of the major challenges, larger investors are increasing their focus on accessing and monitoring the latest climate data. Smaller institutions, however, are still at an early stage of incorporating climate data in their investment strategies. Some 50% of investors with more than $200 billion of assets said they are regularly using climate data to manage risk, compared with just 16% of those with less than $25 billion. Investors with more than $200 billion of assets are also four times as likely to regularly use climate data to identify investment opportunities than those with less than $25 billion.

“Institutional investors face many challenges over the next five years, which is magnified by the fact that these challenges are interconnected. These interconnections add complexity and demand urgency. The reality is, climate change links to a rapidly shifting social context that in turn drives changes to investor demands, all within a very dynamic regulatory environment. These trends are amplified by technology innovation, adding significant cost and time pressure. Quite simply, investing has never been a more complex ecosystem,” Pettit concluded.

About MSCI

MSCI is a leading provider of critical decision support tools and services for the global investment community. With over 50 years of expertise in research, data and technology, we power better investment decisions by enabling clients to understand and analyze key drivers of risk and return and confidently build more effective portfolios. We create industry-leading research-enhanced solutions that clients use to gain insight into and improve transparency across the investment process. To learn more, please visit www.msci.com.

The information contained herein (the “Information”) may not be reproduced or redisseminated in whole or in part without prior written permission from MSCI. The Information may not be used to verify or correct other data, to create any derivative works, to create indexes, risk models, or analytics, or in connection with issuing, offering, sponsoring, managing or marketing any securities, portfolios, financial products or other investment vehicles. Historical data and analysis should not be taken as an indication or guarantee of any future performance, analysis, forecast or prediction. None of the Information or MSCI index or other product or service constitutes an offer to buy or sell, or a promotion or recommendation of, any security, financial instrument or product or trading strategy. Further, none of the Information or any MSCI index is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. The Information is provided “as is” and the user of the Information assumes the entire risk of any use it may make or permit to be made of the Information. NONE OF MSCI INC. OR ANY OF ITS SUBSIDIARIES OR ITS OR THEIR DIRECT OR INDIRECT SUPPLIERS OR ANY THIRD PARTY INVOLVED IN MAKING OR COMPILING THE INFORMATION (EACH, AN “INFORMATION PROVIDER”) MAKES ANY WARRANTIES OR REPRESENTATIONS AND, TO THE MAXIMUM EXTENT PERMITTED BY LAW, EACH INFORMATION PROVIDER HEREBY EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. WITHOUT LIMITING ANY OF THE FOREGOING AND TO THE MAXIMUM EXTENT PERMITTED BY LAW, IN NO EVENT SHALL ANY OF THE INFORMATION PROVIDERS HAVE ANY LIABILITY REGARDING ANY OF THE INFORMATION FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL (INCLUDING LOST PROFITS) OR ANY OTHER DAMAGES EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. The foregoing shall not exclude or limit any liability that may not by applicable law be excluded or limited. Privacy notice: For information about how MSCI collects and uses personal data, please refer to our Privacy Notice at https://www.msci.com/privacy-pledge.

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1
All quantitative data in the Global Institutional Investor report was derived from a survey of 200 hundred executives at 200 separate asset owners across the Americas, the Europe, Middle East and Africa (EMEA) and Asia Pacific. The surveys were conducted by phone in September 2020. Qualitative interviews and quotes came from a separate series of phone interviews.

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