Nearly 40% of investors say a lack of product innovation is curbing ESG adoption

Capital Group’s ESG Global Study 2022 reveals a need for multi-thematic ESG funds that can adapt to changing market conditions

Global investors report a lack of innovation in ESG products and services, according to a new study by Capital Group, one of the largest investment companies in the world, with assets under management of approximately US$2.2 trillion and 91 years of experience.

Among the study’s key findings, investors think there are not enough funds offering a broad spectrum of themes across the waterfront of ESG; they want more innovative products and recognise the need to invest in transitioners (companies that are looking to transition their business models to be more sustainable).

Capital Group’s ESG Global Study surveyed 1,130 institutional and wholesale investors, including pension funds, family offices and insurance companies, as well as funds of funds, retail/private banks and financial advisors, located in 19 markets around the world in 2022. This is the second instalment of the 2022 global study, which seeks to identify key drivers and challenges facing ESG investing.

“Investors looking to access a broad range of ESG themes must currently buy several single-thematic or narrowly focused funds, underscoring the need for all-in-one solutions that allow investors to target sustainability through the widest lens,” said Jessica Ground, Global Head of ESG, Capital Group. “The demand for more innovative ESG funds may reflect a desire to diversify their holdings as investors recognise they need all-weather solutions that can adapt to changing market conditions and better withstand volatility. Furthermore, the study highlights a growing acceptance within the investment community that the transition towards a sustainable future cannot be achieved solely by backing companies that are already leaders at the expense of transitioning companies.”

Investors seek fully diversified ESG investment solutions

The study highlights a gap between investor demand and the availability of funds that provide exposure to multiple themes.

• Nearly four in 10 (39%) of global investors think a lack of product innovation is holding back greater adoption of ESG
• Almost half (46%) of global investors think there are not enough funds aligned to the United Nations Sustainable Development Goals (SDGs)
• Nearly half (47%) also report that existing funds that target the SDGs overly focus on environmental issues
• 43% say there is a specific need for multi-thematic ESG funds.

Investors recognise the need to invest in transitioners

There is growing acceptance among the investors surveyed that a sustainable future cannot be achieved solely by supporting companies considered to be the ESG leaders. Four in 10 investors (40%) currently favour investing in a combination of companies that are ESG leaders and ESG transitioners, while a third (34%) believe that asset managers investing solely with ESG leaders at the expense of transitioners are doing more harm than good. The proportion of investors expecting to focus on ESG transitioners either mainly or exclusively is expected to jump from 21% today to 30% over the next two to three years. The survey revealed that investors in Europe are set to have the highest focus on transitioners going forward, with European investors reporting they plan to increase allocations from 20% today to 34% over the next two to three years.

Jessica Ground, Global Head of ESG, Capital Group concludes: “Our study finds investors want to support a broad range of ESG themes through their investment actions. We can see a more sophisticated and holistic approach to ESG developing, as investors evolve away from negative screening and divestment. In particular, ESG investors seek actively managed, diversified and dynamic solutions providing exposure to multiple themes and a variety of transitioning companies. ESG investors have a strong bias toward active strategies with nearly two-thirds (63%) of global investors saying their preferred approach when integrating ESG is to use active funds. This demonstrates how investors think active managers are uniquely placed to capitalise on and manage ESG opportunities and risks.”

For more on Capital Group’s ESG insights, including copies of both instalments of the 2022 ESG Global Study and 2021 survey report, please click here.