March 12, 2024 — U.S. investors are diverging from investors in Europe, Asia and even Canada when it comes to environmental, social and governance (ESG) investing.
Until recently, institutional investors around the world seemed broadly in agreement about ESG. Although they adopted ESG at different paces, most institutions in North America, Europe and Asia appeared to be moving to integrate ESG metrics into their investment processes and portfolios.
“While the process of ESG adoption continues in Europe and Asia, institutional investors in the United States are at an inflection point,” says Mark Buckley, Global Head of Investment Management at Coalition Greenwich.
In Europe, 94% of the institutional investors participating in a recent study by Coalition Greenwich have adopted ESG in some capacity. In Asia, that share stands at 86% and in North America, 38% of institutions are using ESG. Adoption is at a crossroad in the U.S. with uncertainty on the path forward as only 32% of U.S. asset owners are employing ESG.
In continental Europe, the U.K., Japan, and Canada, a solid majority of institutional investors now require all managers competing for mandates to provide an ESG policy statement and documentation. In Asia excluding Japan, 85% of institutions have imposed such requirements. In the U.S., only a third of institutions require managers to have a documented ESG policy. Coalition Greenwich research reveals similar differences between institutions in the U.S. and investors in other regions when it comes to expected ESG expertise from investment consultants, the use of ESG-specific benchmarks to assess manager investment performance, and other areas.
“At the root of the growing divergence between the U.S. and the rest of the world are differing perspectives on the role and definition of fiduciary responsibility,” says Mark Buckley. “In addition, both asset owners and investment managers in the U.S. could be slowing their adoption of ESG in the face of delayed ESG rulemaking by the SEC and a muddled -ESG legislative environment.”
That being said even with a lower proportion compared to global averages, the sheer size of the institutional market in the United States ensures its continuing influence on the development of ESG investing globally, and the need for managers with ESG expertise.
Seeking Stewardship
Around the world, institutions who have adopted ESG are leaving behind early tactics based on screening out investments that fall short of ESG criteria in favor of more sophisticated approaches based on “stewardship.” Under a stewardship model, investors take an active stance, engaging directly with companies in their portfolios to agitate for positive change. Increasingly, institutional investors are looking for asset managers with well-developed strategies and proven track records in stewardship.
“Institutions are asking their asset managers for proof of both their commitment to and effectiveness in stewardship,” says Christopher Dunn, Head of Investment Management - Continental Europe, at Coalition Greenwich. “This can include annual stewardship reports, case studies and proxy voting records.” In response, many asset managers are deepening their stewardship resources and expanding their intellectual capital in the space.