Institutional investors across the globe are increasingly recognising the materiality of environmental, social, and governance (ESG) factors in their investment strategies, according to Morningstar’s third annual Voice of the Asset Owner Survey 2024. However, US retail investors remain hesitant, with many pulling back from ESG-focused mutual funds and ETFs.
The survey, which gathered feedback from 500 global institutional investors managing over $18 trillion in assets, reveals that 67% of asset owners believe ESG has become “more” or “much more” material in the past five years.
“We believe this is driven by improved understanding of the linkage between ESG issues and company performance, increased action by regulators, and higher levels of ESG awareness among investors and issuers,” said Tom Kuh, head of ESG strategy at Morningstar Indexes.
The survey covered 200 asset owners in the Asia-Pacific region, 200 in Europe, and 100 in North America. Asia-Pacific leads ESG adoption, with 71% of asset owners stating that ESG factors have grown in importance, followed by 68% in Europe and 61% in North America. The US, in particular, lags in ESG investment at the institutional level.
“The observations are that the data, ratings and indexes have improved in the past five years. Four times as many asset owners say they’re a lot or somewhat better, and those sentiments paint a picture of progress and growth, rather than the sense that this is all in retreat and retrenchment,” Kuh said.
The survey also revealed that more institutional investors are incorporating ESG into their strategies, with 35% of respondents allocating over half of their assets to ESG-related investments in 2024, up from 34% in 2023 and 29% in 2022.
The report shows that investors are increasingly focused on specific ESG factors. In 2024, 64% of respondents said environmental factors have become more material, up from 52% the previous year. Social factors saw a significant rise, with 58% now considering them important, compared to 38% in 2023. Governance factors also gained traction, with 55% citing them as material, up from 43% the previous year.
Despite the growing ESG momentum among institutional investors, US retail investors are moving in the opposite direction. A separate Morningstar report revealed that US investors withdrew $4.7 billion from ESG mutual funds and ETFs in the second quarter of 2024, continuing a trend of net outflows.
As ESG investments continue to grow in importance for institutional investors worldwide, the gap between retail and institutional approaches in the US highlights contrasting attitudes toward sustainable investment strategies.
