The view from ground level.
We have been covering climate change and environmental, social and governance issues for many years and are always being asked what other clients are thinking and doing. That’s why we conducted this survey. It took place over 14-25 February 2022, with a sample size of 588 from professionals working in financial services in global regions, in roles related to ESG decision-making. They represent 528 institutions, and USD12.6 trillion in assets under management (AUM). The key findings were:
- What surprised us: Many respondents were unsure of the approach their firm took to ESG, indicating a lack of a well-defined framework. Asia along with the Middle East, North Africa, and Turkey (MENAT) had the highest interest in board effectiveness – we thought Asia would be more regulatory-driven. And only 2% chose biodiversity as a key issue.
- Strong intentions: There are strong indications that ESG will be more incorporated into investment decisions over the next 12 months, although the level of intention varied by region. The main reason to incorporate ESG was to attract capital, followed by peer pressure – performance was one of the weakest reasons.
- Incorporating ESG: How much ESG is incorporated into investment decision-making depends on a range of factors, such as the degree to which the company understands ESG and the size of the firm in terms of AUM, the type of investors and where they have operations and assets.
- Which ESG issues matter most: Decarbonisation was the standout environmental issue that respondents plan to focus on over the next 12 months. Social factors – human rights, gender diversity, employment issues, and data privacy – were more evenly-balanced. On governance, corporate culture and board effectiveness were the leading issues.
- Regional differences: North America stood out in many ways. Those operating in this region have the highest understanding but were less interested in climate change and incorporating ESG into decisions. The region also had the strongest belief in regulations being a hindrance.
- Caution: Although decarbonisation was the top issue, there was less appetite to invest capital than we expected. Even after COP26 in November 2021, only a third of respondents were looking to invest more in mitigation and adaptation, and nearly a quarter weren’t looking to increase investment in climate solutions at all.
- ESG strategy & valuation: Integration is the most popular strategy and this seems to grow as AUM increase. The perception of how “priced-in” ESG was into valuations was consistent – all regions came in well below 5 (on a scale of 0-10), and stock prices had ESG “priced-in” more than bond spreads.
- Views on companies: Public perception was the main reason investors believed corporates were pursuing and only about 20% felt that company sustainability reports were accurate.
- ESG drivers: Respondents felt that businesses and regulators have the most responsibility for driving sustainability but investors expect themselves to move the fastest. In general, most believed regulations such as mandatory disclosures helped the development of ESG.
In conclusion, we found that the level of ESG understanding does not necessarily mean that ESG issues are incorporated into investment decision-making. For investors, attracting capital was the main reason to promote ESG; for corporates to push sustainability, it was public perception.
First published 21st March 2022.
Would you like to find out more? Click here to read the full report (you must be a subscriber to HSBC Global Research).