Traditional Obstacles to ESG Investing Are Fading

Just 10% of respondents to a survey by State Street say they view fiduciary duty as a barrier to ESG integration.

A global survey of both institutional and retail investors sponsored by State Street Corporation found that traditional obstacles to environmental, social and governance (ESG) investing are fading, while one significant barrier remains: the lack of transparent, standardized and quality data.

The Investing Enlightenment: How Principle and Pragmatism Can Create Sustainable Value through ESG found that nearly all (92%) institutional investors surveyed want companies to explicitly identify ESG factors that materially affect performance, while 60% note a lack of industry standards for measuring ESG performance as a significant barrier to full integration.

“We have entered into a new era of investing characterized by leveraging capital markets for a better society,” says Lou Maiuri, executive vice president and head of State Street Global Exchange and Global Markets businesses. “The promise of this new type of investing, ESG, is grounded in data transparency and engagement. Having a custodian for data has become just as critical as having a custodian for financial assets when trying to deliver long-term value for investors in today’s market.”

While data and a lack of transparency continue to pose hurdles to ESG investing, the study found that many of the traditional barriers to ESG integration are receding:

  • Only 35% of institutional investors believe ESG equals lower returns;
  • Just 10% of survey respondents say they view fiduciary duty as a barrier to ESG integration; and
  • Nearly three-quarters of investors (74%) see three-plus years as a realistic timeframe to gain outperformance from ESG investments.

Based on its research study, State Street has developed a model to help investors successfully integrate ESG investing into their investment strategies. This new model is based on five actions:

  • Take ownership: Ensure there is decisive support from the organizations’ c-suite and board on ESG issues;
  • Get educated: Provide training on ESG across the investment organization, particularly sector portfolio managers, financial advisers and analysts;
  • Ask to get the data and solutions you need: In addition to asking companies for data, support industry efforts for increased standardization of ESG data and reporting requirements, and enable meaningful conversation between financial advisers and individual investors;
  • Incorporate a materiality filter: Investment decisions should be based on the material ESG issues; and
  • Align time horizons: Adjust performance metrics and incentives structure to reflect the longer-term nature of ESG investing.

The findings from State Street’s Center for Applied Research (CAR), co-authored by Professor Robert Eccles, visiting professor at the Said Business School of Oxford University, will inform an expansion of ESG solutions across State Street, including the impending introduction of a suite of ESG analytics tools and enhanced asset safekeeping using data-driven insights, State Street said.