A recent Callan Institute survey found institutional investors are incorporating environmental, social and governance (ESG) factors at slower rates in their investment decisions.
According to the data, 35% of institutional investors have added ESG elements into the investment decisionmaking process, down from 49% in 2021. This is the lowest rate of adoption since 2017, when 37% of institutional investors added the funds in their plans.
Of the 35% who incorporated ESG in 2022, half said they added the funds to meet their fiduciary responsibility, while 47% of those who did not said it was because the benefits were unproven or unclear.
The survey comes at a time when ESG adoption is heavily debated upon—the Department of Labor (DOL) recently cleared sustainable funds in 401k plans, prompting praise and neutrality from both sides of the political sphere.
“The level of interest and debate about ESG has never been more intense in the U.S.,” said Tom Shingler, senior vice president and ESG practice leader at Callan, in a statement. “While there are a number of asset owners incorporating ESG at increasingly complex levels, there is federal regulatory uncertainty and differing ESG policies across states and their pension systems — which have led to confusion and inaction in some cases. Additionally, there is backlash against ESG from some stakeholders who question its contribution to investment outcomes, while other stakeholders demand increasing levels of ESG incorporation.”
Callan fielded responses from 109 institutional investors, 7% who are in defined contribution (DC), or defined benefit (DB) plans associated with nonprofit organization, 34% who work in public plans and 35% who have $3 billion or more in assets.
Foundations lead in ESG adoption
Foundations led ESG adoption more than any other sector—over half (53%) said they incorporated sustainable factors into their investment decisions in 2022. Endowments trailed right behind, with 47% of organizations adding ESG. Corporate plans came in third at 26%.
Public plans had the most significant change in the past year—at 63% in 2021 compared to just 24% in 2022.
Forty-seven percent of mid- to large-sized institutional investors incorporated ESG factors into investment decisions, the highest by investor size. Large investors had ESG incorporation rates above 40%, while smaller ones were under 35%. Callan data said this may be attributed to larger investors typically having the most resources to dedicate to ESG incorporation and being under high levels of stakeholder scrutiny.
Northeast investors more likely to embrace sustainability
Institutional investors in the Northeast region dominated ESG incorporation in their investment decisions, with over half (53%) of investors adding sustainability. Pacific region investors had the second highest rate at 41%.
Since 2013, the Pacific and Northeast regions have seen the largest increase in ESG adoption, with adoption rates more than doubling for both. Twenty percent of investors in the Pacific region added ESG into their investments nearly 10 years ago, while just 23% of those in the Northeast did back in 2013.
Plan adoption still low within DC plans
Despite an increase in ESG interest, the Callan DC Index found that DC plan adoption of ESG options is still relatively low. According to the Index, 14% of DC plans offered a dedicated ESG option, while 86% did not.
Twenty-five percent of non-corporate DC plans offered a standalone option, and only 4% of corporate DC plans did.
In addition, utilization for all sponsor types remained low, said Callan research. Allocations ranged from 0.3% to 8.6% of total plan assets, with an average allocation of 2.7%. According to Callan’s 2022 DC Trends Survey, 7% of plan sponsors expect to add an ESG option next year, up from 4% in 2020. In addition, 31% of DC plans will consider adding an ESG fund to their plan.
More findings from the Callan survey can be found here.
SEE ALSO:
- ESG Funds in 401ks Cleared by New Labor Department Rule
- Early Reactions Show Praise for DOL ESG Rule
- ESG Rule Reactions Rolling In
Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with over six years of experience and a passion for telling stories and reporting news. Amanda received her degree in journalism and government and politics at St. John’s University. She is originally from Queens, New York, but now resides in Denver, Colorado with her partner. In her free time, Amanda enjoys running, cooking, and watching the latest drama show.
