Environmental, Social, and Governance (ESG) Integration in the United States

Earlier this month CFA Institute and the United Nations-supported Principles for Responsible Investment (PRI) Initiative released two new reports: ESG Integration in the Americas: Markets, Practices, and Data, and Guidance and Case Studies for ESG Integration: Equities and Fixed Income. These reports are the result of a series of surveys, global workshops with CFA Institute members and other global financial professionals, and ESG research conducted by CFA and PRI. [PRI is an international network of investors working together to put the six principles for responsible investment into practice.]

Here we focus on the state of ESG integration in the United States; in future blogs we will look at other individual markets covered in the reports.

We surveyed 217 financial professionals located in the United States and held workshops in Boston and New York City to better understand the current state of ESG integration in the United States, and found the following trends:

• ESG integration in the US is not as advanced as ESG integration in other developed markets although large institutional investors and specialized investors are driving the adoption of ESG. As is the case in all the markets we visited, ESG has a definitional problem—about 25% to 33% of survey and workshop participants equate ESG integration with negative screening. Negative screening, however, limits the investing universe and thus risks underperformance. In contrast, the ESG integration practiced by most investors these days is generally more sophisticated than simple negative screening. Nevertheless, the perception still holds with a not insignificant minority of investors.
• US firms are less likely than their European counterparts to have specialized ESG staff charged with integration. Risk management and client demand are the main drivers of ESG integration in the United States, while a lack of comparable historical data and a limited understanding of ESG issues are seen as the two main hurdles for ESG integration.
• Some practitioners remain confused about whether ESG integration conflicts with their fiduciary duty. This confusion appears to stem mainly from the belief by some that ESG integration is synonymous with negative screening; the latter limits one’s investment universe and may be a breach of fiduciary duty. However, most practitioners understand that the integration of material ESG information is simply part of a thorough fundamental analysis.
• Issuers as well as practitioners in the United States would welcome ESG standards for disclosure that would allow them to track the material ESG metrics that most impact a company’s business. The survey and workshops found consensus among US investors that the ESG data provided by companies have improved in the past five years, but still have a long way to go before the data are consistent, high quality, and comparable.
• Survey respondents feel that ESG issues impact share prices more than they impact corporate bonds and sovereign debt, with corporate governance factors impacting each asset class more than twice as often as social and environmental factors.

We asked survey respondents about the outlook for ESG in five years time (the survey was conducted in 2017). Survey respondents expect that by 2022, ESG factors will still impact share prices more than they impact corporate bonds and sovereign debt. They also believe that for all asset classes, the impact of E, S, and G factors on prices will be significantly higher than it is today.

Our survey found that US asset managers and analysts rarely incorporate material ESG issues in  their stock or credit analyses (only 13% say that they often or always do so). Even fewer are adjusting their models based on ESG data (8% say they do so for equities, and 7% say they do so for corporate bonds).

When asked who was responsible for the implementation of ESG at their firms, survey respondents most often answered non-ESG portfolio managers (47%) and senior management (31%). This contrasts with those in Europe, the Middle East, and Africa, where ESG specialists were primarily responsible for implementation.

CFA Institute and PRI will be releasing the survey results in a series of presentations in the US. Surveys on other regions will follow.

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