A recent report on Australian and New Zealand asset owners reveals a significant gap between the growing focus on ESG factors and their actual impact. This gap is most evident in long-term investment strategy.
While the importance of ESG is acknowledged, the research indicates that financial objectives and regulatory benchmarks consistently take precedence in strategic asset allocation (SAA) decisions.
Varied approaches and limited strategic uptake:
The study, based on interviews and surveys with investment strategy leaders, found that asset owners employ a wide range of methodologies for ESG integration. Some use a top-down approach, adjusting capital market assumptions (CMAs) to account for climate risks. Others prefer a bottom-up methodology, incorporating sustainability at the individual investment or asset class level.
Despite these efforts, ESG information is not yet a primary determinant in setting long-term investment strategy. The research highlights that ESG factors rarely drive SAA decisions, remaining secondary to financial performance and other competing priorities.
Challenges hinder deeper integration:
Several significant challenges are impeding the more meaningful incorporation of ESG into SAA processes. Data limitations, methodological complexities, and organizational structures are cited as key obstacles.
The report notes that ESG information is often relegated to asset class teams and is not a central concern for investment strategy leaders. Furthermore, the focus on ESG is heavily skewed towards environmental factors, with social and governance aspects remaining underdeveloped due to the difficulty in quantifying and integrating them into existing models.
Regulatory and internal constraints:
Regulatory policies, such as Australia’s ‘Your Future, Your Super’ test, are identified as a barrier to ESG innovation. These regulations, combined with competing internal priorities, can discourage asset allocators from adopting more sophisticated long-term strategies that incorporate ESG.
The report concludes that effective ESG integration requires a collaborative effort: board members must understand where the highest impact can be achieved, senior management needs to set deliberate strategies, and regulators must be mindful of the unintended consequences of their policies.
