Investors are allocating a higher portion of their portfolios to ESG-oriented investments, according to a survey by BNP Paribas.
Almost half of investors (47 percent) say ESG will be central to almost everything they do in two years. Currently, 66 percent of investors incorporate ESG into less than half of their portfolios, while more than two fifths are incorporating a quarter or less of their portfolio into ESG.
Only a third of investors are incorporating ESG into more than half of their portfolio, but that figure is expected to jump to 55 percent in two years.
Despite this trend, ESG today still plays a minor or growing role in 48 percent of investor organizations, though that is expected to fall to 18 percent in two years – highlighting the growing importance of the issue.
‘Though ESG investments have moved into the mainstream, institutional investors need to actively take the decision to incorporate this approach into their investment strategy – something that more will be doing within the coming two years,’ write the report authors.
Today, 45 percent of institutional investors say their ESG capabilities are embedded throughout their organization, nearly double the 2019 figure of 23 percent.
‘There are more board members, CEOs and executive directors who now understand the long-term value of more holistic thinking and value creation for all stakeholders,’ says Eszter Vitorino, senior advisor impact and sustainable investment at Kempen Capital Management, in the report.
Investors are committing to net-zero
Net-zero has become an important part of the ESG narrative in recent times, with investors committing to achieving global net-zero emissions by 2050 by aligning their investment strategy with that goal.
Reaching net-zero greenhouse gas emissions by 2050 is considered vital to limiting global warming to 1.5°C, the primary goal of the Paris Agreement.
Nearly one fifth of investors have commitments in place at the company level to achieve global net-zero targets.
One third of investors (31 percent) say they are at the early stages and are still exploring the steps necessary for their firm to set a 2050 net-zero emissions goal. As few as 5 percent of investors say they have made a commitment but have not begun to make capital reallocations. But 27 percent of investors have still not committed or will not commit to align their investment strategy with achieving global net-zero emissions by 2050.
‘If the world economy doesn’t go to net-zero, financial institutions won’t be able to reach their net-zero goals,’ says Erick Decker, chief investment officer for AXA southern Europe and emerging markets, in the report. ‘We can’t invest in [just] one company offsetting its carbon emissions so, even after a best-in-class sector and name selection approach, we can only go as fast as the economy goes. Period.’
Social aspects challenge investors most
More than half of investors (51 percent) cite social as the most challenging component to assess and incorporate into investment analysis, compared with 39 percent for environmental and 27 percent for corporate governance.
Social issues have presented an increasing challenge in each BNP Paribas survey: in 2017, 41 percent of investors found social the most challenging component to assess, rising to 46 percent in 2019 and to more than half in 2021.
Environmental issues as a challenge fell from 41 percent in 2017 to 30 percent in 2019 but experienced a slight jump to 39 percent in 2021.
‘Our research has consistently indicated that environmental aspects are less challenging to analyze and integrate than social aspects,’ say the report authors.