Environmental, social and governance (ESG) considerations continue to increase for financial market participants at all levels, from asset managers and pension plan sponsors to wealth advisors and private investors. Many global investors already include ESG factors in their assessment of listed companies in developed markets. We are now seeing increasing interest in applying ESG considerations across a broader range of asset classes and regions.
A growing list of ESG data sources is emerging to support increasing market demand; However, the availability and reliability of data for certain asset classes remains a challenge. In this article, we explore three areas where investors are looking for more ESG data: fixed income, emerging markets and private equity.
Fixed income investors want more reliable sustainability data
Private investor demand has been a key driver for the increase in sustainable considerations in fixed income investments. ESG-focused fixed income investments have experienced impressive growth in recent years. Because flows to sustainable equity funds have decreased in 2022, the inflow of sustainable fixed income funds has doubled in the third quarter of 2022 compared to the second quarter.1
The availability of ESG data has traditionally been a challenge for fixed income investors. The increasing availability of both qualitative and quantitative ESG data has been an essential factor for the growth of sustainable fixed income investments. However, investors continue to demand more comprehensive data to provide the necessary signals to manage downside risk and track opportunities.
A recent survey of 300 U.S. and European asset managers facilitated by Reuters found an increase in ESG considerations in fixed income. In this poll, more than three-quarters of respondents said they consider ESG factors when making fixed income investments, compared to 42 percent of respondents who said the same in 2021.2 In Europe alone, more than 2,500 billion euros had been invested through sustainable investment funds at the end of the first quarter of 2022.3 As inflows into sustainable investment funds continue to rise, Morningstar Sustainalytics is responding to investor demand for more and richer data.
Emerging markets: Investors are increasingly looking to China for ESG opportunities
Investors have less data available to assess ESG risk in emerging market companies, which typically disclose fewer sustainability details than their developed market counterparts. China is the largest contributor to all major emerging market indices,4 Investors are therefore mainly interested in the ESG risk profiles and management of companies in the region. President Xi Jinping’s call for China to reach net zero by 2060, alongside growing demand for electric vehicles5 and exponential growth of ESG funds driven by retail investors in the country6 appears to be a signal for a broader societal shift towards sustainability. This shift is also reflected in companies’ management of ESG risks and relevant ESG issues.
Based on Morningstar Sustainalytics’ ESG risk assessments, some early signs indicate that Chinese companies are improving their ESG risk management, as shown below.
Source: Sustainalytics ESG Risk Rating, October 2022
Investors want more ESG disclosures from private companies
Private equity investments represent a significant portion of assets under management across all asset classes (approximately $6.3 trillion worldwide). The industry is so large that without the active participation of private equity investors, society cannot address environmental and social issues.7 That’s why asset owners are looking for private equity investors who want to integrate ESG considerations into their investment decisions. APG, a prominent Dutch pension investor, is an example to watch as it leads an initiative to report on sustainability issues for its private equity investments, as well as for its other investment strategies.8 Additionally, the World Economic Forum has recognized the importance of integrating ESG into private equity by outlining its “Monday morning priorities” for private equity investors.9 These developments are driving investor demand for more ESG data on private companies.
To meet the growing demand for ESG data in the three areas discussed, Morningstar Sustainalytics has developed its analyst-based ESG risk assessments to more than 16,300 companies to support investors across their entire portfolio. This expanded universe provides broader coverage of analyst-based research and ratings and includes greater coverage of fixed income issuers, private companies and Chinese companies listing A and/or B shares. Asset managers, asset managers and retail managers who consider ESG factors to guide their security selection, portfolio construction and reporting now have access to a broader range of data across asset classes and geographies.
For more information about Sustainalytics’ Morningstar ESG risk assessments, please contact us with our customer advisory team.
1. Morningstar (2022), “Global Sustainable Fund Flows: Q3 2022 in Review”, Morningstar, accessed (11.09.2022) from Morningstar.com. (Inflows from sustainable equities: Q2, USD 21.3 billion, Q3, USD 10.8 billion. Inflows from sustainable fixed income securities: Q2, USD 5.2 billion, Q3, USD 11 billion)
2. Reuters (2022), “Managers Use Survey Results on ESG Fixed Income Increases”; Reuters; accessed (10.10.2022) at www.reuters.com
3. De Standaard (2022), “The growing pains of sustainable investing”; De Standaard consulted (10.15.2022) at www.standard.be
4. As of October 17; 32.29% in the FTSE Emerging All Cap Index / 31.35% in the MSCI Emerging Market Index / 20.12% in the FTSE Emerging Markets Broad Bond Index
5. De Standaard (2022), “Beijing races past Europe with electric cars”; De Standaard consulted (10.17.2022) on www.standard.be
6. Bloomberg (2022), “Xi’s ESG boom funnels billions into coal, liquor and defense stocks,” Bloomberg accessed (10/10/2022) at www.Bloomberg.com
7. Harvard Business Review (2022), “Private Equity Should Take the Lead in Sustainability”, Harvard Business Review accessed (12.10.2022) on HBR.org
8. APG (2021), “APG supports initiative to better assess private equity sustainability, APG consulted (12-10-2022) on APG.nl
9. World Economic Forum (2022), “Five ‘Monday morning priorities’ for private equity investors looking to make progress on sustainability”, WEF accessed (12-10-2022) at weforum.org