ESG factors are increasing across the board among institutional investors, with climate being a material factor driving investment policy, according to a Morningstar study.

Morningstar’s Voice of the asset owner survey also found that variance in the ESG investing landscape has emerged across geographies. With clear differences emerging between the level of criticism and political roadblocks based on location.

This annual survey consists of two phases – qualitative and quantitative. The former, which launched this week, includes direct conversations with 13 asset owners from a range of institutions across North America, Europe, and Asia.

Climate as core focus

This year’s survey focused on topics including the role of ESG in investment decisions and opinions on service providers. As well as investment objectives and policies, the urvey also looked at views on current and future investment trends and the impact of regulatory change.

Climate remains the key material factor driving investment policy, with biodiversity, water, and reporting around Scope 3 emissions being commonly cited as some key emerging climate factors.

“Climate is in the lead and that’s because the data that’s available is better,” said one surveyed US corporate pension fund.

Furthermore, asset owners also noted that conversations around climate are moving into the boardroom, showing a coming together of the environmental and governance components of ESG, as climate becomes an important component of good governance.

This growing consensus was evidenced by participants voicing growing concerns around areas where they believe better corporate governance is needed, referencing voting structures at Meta, board independence questions at Tesla, and the recent suit by ExxonMobil against two shareholders for bringing a specific resolution.

Better access to data was also cited as an area for improvement.

“Another challenge is, yes, the data […] We know that some data are still missing, some are still not fully reliable because the companies also must understand the way they have to report and sometimes we see some variations,” said one European participant within the insurance sector. 

Looking ahead

While there is a spectrum of approaches to ESG ranging from finically material risks to impact considerations, there is no doubt that the focus on ESG factors is increasing across the board, Morningstar stated.

Respondents also indicated that over the past five years, ESG has become more material to their investment considerations, adding that they expect this trend to continue.

Morningstar said that the conversations from the survey will lead the firm to further explore institutional investors’ views on what types of tools can be developed or improved by service providers to address evolving regulatory and reporting requirements as asset owners continue to build out their ESG capabilities.

Morningstar analysis on funds impacted by ESMA’s ESG fund naming guidelines

In a separate study, Morningstar identified around 4,300 European Union funds with ESG or sustainability-related terms in their names that may fall within scope of the new guidelines.

Of 2,500 funds with stock holding adequate data, Morningstar found that more than 1,600 are exposed to at least one stock potentially in breach of exclusion rules.

If all these funds were to keep their names, it could lead to stock divestments worth up to €36.8bn.

The sectors most affected by the potential divestments include energy, industrials, and basic materials, according to the study.

The most-affected countries would be the US, France, and China, ranked in terms of market value, but China, the US, and India in terms of the number of companies.

The most affected stocks would include TotalEnergies, Tencent Holdings, Ecolab, and Shell.

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