Asset Owners Highly Committed to ESG As Implementation Challenges Persist; Morningstar Survey

As stakes rise, institutional investors address an increasingly complex and challenging sustainable investment environment.

CHICAGO, Oct. 4, 2023 /PRNewswire/ -- Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment insights, today published findings from its second annual Voice of the Asset Owner survey, revealing that two of three asset owners (67%) believe ESG has become more material to investment policy in the past five years, with the environment and issues around net-zero emissions cited as key ESG materiality drivers. And while implementation challenges continue to persist, this global cohort reported increasing their allocation to ESG strategies.

The global quantitative survey, conducted by Morningstar Indexes and Morningstar Sustainalytics, included 500 asset owners across 11 countries in North America, Europe and APAC with combined assets of approximately $10.7 trillion.  Survey questions were based on direct interviews conducted with 10 asset owners earlier this year.

Those surveyed included pension funds, insurance general accounts, outsourced CIOs and family offices, with six in 10 managing more than $1 billion and over a quarter managing $10 billion or more. Questions covered investment approach, the materiality of ESG considerations, perspectives on regulation and implementation and the relative quality of ESG data, ratings and indexes.

Thomas Kuh – Head of ESG Strategy, Morningstar Indexes, said: "The second Morningstar Voice of the Asset Owner survey confirms that institutional investors remain highly committed to integrating ESG factors into their global investments, but challenges related to lack of regulatory clarity and the need for better data and resources continue to persist." 

Growing Challenges to Implementation. Asset owners identified a range of growing ESG implementation challenges this year, ranking market data, the market environment, and regulation highest. Tellingly, participants did not rate any ESG challenges as having decreased:

• ESG market data is hindered by lack of standardization (30%) as well as reliability and timeliness (29%), according to those surveyed, both up from 15% last year.
• Impact on returns was again the leading ESG implementation issue, cited by nearly four in 10 (38%), as sustainable investment strategies had a challenging year in 2022 amid the strong performance of the carbon-intensive energy and utilities sectors and the downturn of more ESG-friendly technology stocks.
• Three in 10 surveyed cited ESG regulation as an implementation challenge, up 10 percentage points from 2022. 

Regulatory Confusion Another Growing Challenge. While asset owners participating in Morningstar's qualitative discussions earlier this year expressed optimism about the usefulness of ESG regulation, they also expressed growing frustration echoed in the quantitative survey: 

• Those surveyed saying regulations and related reporting requirements are a help fell by 11 percentage points from 60% in 2022 to 49%. The drop is especially pronounced in APAC nations, falling from 59% last year to 46% this year and those with AUM of $10 billion or more (63% last year, 49% this year). Those working for pension funds (46%) and insurance general accounts (45%) were more likely to find ESG regulations less helpful.
• Lack of clarity and rising costs are ESG regulation pain points. Among the 28% of those surveyed saying ESG regulations have been a hindrance, more than four in 10 (42%) see them as confusing or unclear (up from 29% last year). This rises to 46% in Asia. And only 18% of the 49% globally who say ESG regulations have helped this year believe they have minimal costs, down 20 percentage points from 38% in 2022 and dropping to 15% among European asset owners.

Asset Owners a Catalyst for Change. While survey respondents still see a marked improvement in the quality of ESG data, ratings, indexes and tools in the past five years, asset owners' needs continue to evolve:

• Nearly half (48%) would benefit from more accuracy, with more accurate ratings a growing priority for those with AUM of $10 billion or greater (53% this year from 42% in 2022).
• When asked which elements of ESG ratings, indexes and data need to be improved most over the next five years, quality and relevance won out for the second consecutive year.

Asset owners are engaging with a range of stakeholders to close gaps around the quality of ESG data, ratings and tools, holding international standard setting bodies (38%), rating agencies (36%) and politicians (34%) most responsible. 

Artificial intelligence is expected to have a growing impact. The majority predict that AI adoption will increase in five years, most likely in data collection (70%) and ESG analysis (66%), which jumps to 75% and 71%, respectively, in Europe. 

"As stewards of some of the largest pools of global capital, asset owners have stayed anchored to their fiduciary duty despite a range of challenges related to ESG market data, regulatory confusion and market performance," added Arnold Gast, ESG Research Director at Morningstar Sustainalytics. "As their job becomes increasingly complex, asset owners continue to raise their expectations of a range of key stakeholders to provide better insight, research, data and tools to address the evolving sustainable investment landscape." 

About Morningstar Indexes and Morningstar Sustainalytics
Morningstar Indexes and Morningstar Sustainalytics have recently formed a strategic alignment to provide a more holistic and robust ESG offering to Morningstar clients. This growing collaboration includes ESG-related products, insights and research. 

As the fastest-growing global index provider for the last two years according to Burton-Taylor International Consulting, Morningstar Indexes was built to keep up with the evolving needs of investors—and to be a leading-edge advocate for them. Morningstar's rich heritage as a transparent, investor-focused leader in data and research uniquely equips Morningstar Indexes to support individuals, institutions, wealth managers and advisors in navigating investment opportunities across all major asset classes, styles, and strategies. From assessing risk and return with traditional benchmarks to helping investors effectively incorporate ESG objectives into their investment process, our range of index solutions spans an investment landscape as diverse as investors themselves. We help investors answer today's increasingly complex questions so that they can more easily reach tomorrow's goals. Please visit indexes.morningstar.com for more information. 

Morningstar Sustainalytics is a leading ESG data, research, and ratings firm that supports investors around the world with the development and implementation of responsible investment strategies. For more than 30 years, the firm has been at the forefront of developing high-quality, innovative solutions to meet the evolving needs of global investors. Today, Morningstar Sustainalytics works with hundreds of the world's leading asset managers and pension funds who incorporate ESG information and assessments into their investment processes. The firm also works with hundreds of companies and their financial intermediaries to help them consider material sustainability factors in policies, practices, and capital projects. Morningstar Sustainalytics has analysts around the world with varied multidisciplinary expertise across more than 40 industry groups. For more information, visit www.sustainalytics.com.

About Morningstar, Inc.
Morningstar, Inc. is a leading provider of independent investment insights in North America, Europe, Australia, and Asia. The Company offers an extensive line of products and services for individual investors, financial advisors, asset managers and owners, retirement plan providers and sponsors, and institutional investors in the debt and private capital markets. Morningstar provides data and research insights on a wide range of investment offerings, including managed investment products, publicly listed companies, private capital markets, debt securities, and real-time global market data. Morningstar also offers investment management services through its investment advisory subsidiaries, with approximately $264 billion in assets under advisement and management as of June 30, 2023. The Company operates through wholly- or majority-owned subsidiaries in 32 countries. For more information, visit www.morningstar.com/company.  Follow Morningstar on Twitter @MorningstarInc.

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