Institutional investors rank climate risk as top ESG concern but take little action in portfolios: Macquarie survey

Institutional investors are failing to address environmental risks in their portfolios, despite ranking the climate crisis as their number one ESG concern, according to a Macquarie survey.

Institutional investors are failing to address climate risks in their portfolios and are still dragging their heels on committing to net zero targets, according to a new survey. Picture: Dominic Elsome

Institutional investors are failing to address climate risks in their portfolios and are still dragging their heels on committing to net zero targets, despite ranking the climate crisis as their number one ESG concern, according to a new survey from Macquarie Asset Management.

While more than half of investors see climate change as the greatest ESG threat, this is yet to translate into action, with just one in three committing to reaching net zero portfolio emissions by 2050.

Meanwhile, only 47 per cent of the 180 investors surveyed, including asset managers, banks and pension funds, are tracking their portfolio emissions.

Less than half — 46 per cent — have made a move to address physical and transition climate risks in their investment portfolios, underscoring the depth of the challenge the investment community is facing through the crisis.

But the vast majority, or 89 per cent, expect to increase their focus on ESG over the next two years. Further, a large majority now share the view that a positive sustainability strategy can improve financial returns, Macquarie found.

Still, only 22 per cent and 20 per cent expect to significantly increase allocations to sustainability-integrated and ESG outcome-linked investments.

The investors surveyed manage more than $US21 trillion ($29 trillion) of assets across the globe.

While 35 per cent are committed to reaching net zero, investors in Australia, New Zealand and Asia are ahead of the pack, at 42 per cent and 40 per cent respectively, according to the asset manager. Just 20 per cent of large investors in the Americas have stated net zero targets.

Most investors said they had evolved their approach to ESG since 2019, when Macquarie last conducted the survey.

The percentage of firms with a dedicated ESG function rose from 47 per cent to 59 per cent over the two-year period amid an intensifying focus on ethical investing.

“While the results of the survey highlight the progress the institutional investment community has made in incorporating ESG factors into their investment approach, our survey also highlights the many challenges such investors continue to face in better understanding and managing how physical and transition risks posed by climate change may impact their investment portfolios,” the head of Macquarie Asset Management’s client solutions group, Phil Peters, said.

“This is not a straightforward process given the diverse nature of most portfolios, which means asset owners and asset managers will play a key role in supporting investors as they seek to identify, assess, and manage both existing and emerging ESG risks and opportunities.”

The survey found investors were cautious about divesting assets with high ESG risks.

Just 7 per cent had significantly divested, while a further 32 per cent had ‘somewhat’ increased such divestment in recent years.

“Looking forward, those figures rise to 17 per cent and 47 per cent respectively,” Macquarie said

“Europe-based investors are more committed, with 74 per cent expecting to increase active divestment over the next two years. However, those based in the Americas are less advanced. There, just 11 per cent have significantly increased divestment in the past two years and three per cent expecting to do so in the future.”

As ESG investing moves sharply into the mainstream, professional investors are bracing for a big shift in their compensation, which has so far lagged the corporate world on ESG-linked executive remuneration.

Just one in seven, or 14 per cent, of investors surveyed work for organisations that link compensation to ESG performance. But 35 per cent think the two should be linked. That compares to the 52 per cent of S&P 500 companies that use ESG metrics in executive compensation.