Global investors are taking a holistic approach as they look to comprehensively embed ESG into the investment process.

According to Capital Group’s ESG Global Study 2022, “The increasing ESG momentum is being fuelled by client demand and external pressures. More global investors this year say their approach to ESG is driven by client expectations and reputational concerns (42% vs. 37% in 2021).”

In its second year of research, the ESG Global Study surveyed 1,130 global investors and was conducted by CoreData Research between February and March 2022. The survey respondents were based in 19 countries and regions from Europe, Asia-Pacific and North America.

ESG adoption: Europe leads the ESG charge

According to the survey report, Europe continues to lead the world in ESG adoption, with more European investors (31%) citing ESG as central to their investment approach than those in Asia-Pacific and North America. Asia-Pacific ranked second at 22% and North America third at 18% – a two percent increase from last year.

Source: Capital Group ESG Global Study 2022

“Europe also boasts the highest percentage of ESG users (93% vs. 79% North America, 88% Asia-Pacific). This reflects the more mature European ESG market and regulatory framework. The North America region, by contrast, has the least conviction in ESG and the lowest percentage of ESG users,” states the report.

Given the rising interest in ESG investing, most investors now view it as a permanent part of the investment landscape, with just 13% of global investors believing that ESG is a passing fad that will go out of fashion.

ESG momentum drivers: greenwashing risk reduces, and climate change concerns intensify

Besides reputational concerns and client demand to invest in renewable energy and sustainable development goals, another factor driving ESG momentum is “reduced concern about greenwashing, giving investors more trust and confidence to invest sustainably,” the report further added.

Source: Capital Group ESG Global Study 2022

In 2022, the perceived prevalence of greenwashing has dropped across all regions, but most strikingly in Asia-Pacific, where it has reduced to 42% from 56% in 2021. Furthermore, this year, less than half of the global investors think greenwashing is prevalent within the asset management industry (48% vs. 57% in 2021).

Global investors are concerned about climate change, which is why it is a key dimension of ESG considerations for investors and at the forefront of their minds. The continued dominance of the environmental (E) element of ESG explains the more focused allocation to this component of ESG, which has slightly increased its share from last year (47% vs. 44% in 2021).

Source: Capital Group ESG Global Study 2022

While climate change is a top priority item for ESG investors, four in 10 investors (41%) think social issues are being overlooked because of the focus on climate change. This confirms why global allocations to the social (S) segment of ESG have remain unchanged, while the focus on the governance (G) element has marginally decreased this year – 27% vs. 31% in 2021.

Implementing ESG: ESG integration, active strategies and asset classes

ESG integration remains the most used implementation strategy and is seen as integral by almost six in 10 (59%) global investors who look to comprehensively embed ESG into the investment process.

Investors are moving away from basic investment selection or screening methods (positive screening and negative screening) towards more targeted and sophisticated investment strategies, including thematic investing and impact investing.

This year’s second and third most popular strategies are thematic investing (49%) and impact investing (47%). Positive screening (41%) and negative screening (40%) dropped to the fourth and fifth most popular implementation strategies, respectively. According to the survey report, usage of these screening strategies has declined from over half of investors in 2021 to four in 10 this year.

When investing in ESG, a strong inclination towards active strategies is again noticeable this year. Nearly two-thirds (63%) of global investors prefer active funds.

Source: Capital Group ESG Global Study 2022

Investors prefer active fund managers to integrate ESG because these money managers take a hands-on approach as a portfolio manager, and given that they pick and choose investments, they are more likely to engage with a company directly on ESG risks and opportunities. Active funds are most popular among North American (69%) and European (68%) investors.

According to the survey report, equities (80%) and bonds (58%) remain the most popular asset classes to gain exposure to ESG among global investors. However, this year, investors have increased their usage of alternatives (47% vs. 41% in 2021), real estate (27% vs. 24%) and notably commodities (25% vs. 8%).

Source: Capital Group ESG Global Study 2022

As economies emerged from the COVID-19 pandemic and struggled with supply chain disruptions, inflation rose and started flipping the global economic spirit. The Russia-Ukraine conflict exacerbated the supply chain challenges and added to inflation. The ESG asset classes investment distribution in the report indicates a shift toward alternative investments that can protect against inflation.

As an ESG asset class, allocations in emerging markets are growing. Emerging markets are creating opportunities for investors and are being viewed as a more popular way to gain exposure to ESG (36% vs. 28% in 2021). This likely demonstrates that some investors see developed-markets ESG as a crowded space and are turning to emerging markets for ESG-focused investments.

Conclusion

A significant expansion of ESG investing is going on in different parts of the world. There is also a steady increase in finance and treasury commitment to ESG investing despite business uncertainty. Integrating ESG considerations into investment strategies using the investment process to reflect your organization’s values and beliefs can lead to margin improvements and higher returns.

There is increasing interdependence between environmental, social and governance issues. However, not all ESG components are given equal weight when it comes to investing. The growing importance of the E element in ESG should not lead to its dominance at the expense of the others.