Dive Brief:
- Investors and asset owners are increasingly asking asset managers to offer more detailed reports on ESG-related activities, according to a recent report from research firm Cerulli Associates.
- The report found that more than half of institutional investors (58%) surveyed either require or have plans to require asset managers to offer portfolio-level exposure to financially material ESG risks, along with thematic and impact reporting. Meanwhile, almost a quarter (23%) of asset owners require asset managers to report on ESG engagement activities.
- The single biggest driver for transparency in ESG reports is increasing pressure from stakeholders, including regulators, clients and the public, Gloria Pais, a Cerulli analyst focused on institutional research, told ESG Dive. However, Pais added that the anti-ESG backlash is driving more scrutiny. “The anti-ESG movement has made some asset owners more cautious, but for many, it has reinforced the need for data-driven ESG reporting,” Michele Giuditta, a director of institutional practice at Cerulli, said in emailed comments.
Dive Insight:
Cerulli’s findings are the product of two studies: a survey of 200 institutional investors with assets under management ranging from $100 million to more than $5 billion conducted in the second quarter of 2024; and a survey of 35 asset managers with assets under management ranging from $350 million to roughly $5 trillion conducted in the first quarter of 2024.
The research firm — which offers finance professionals market intelligence and recommendations on strategy — said a shifting regulatory environment, conflicting disclosure policies from states and pressure from stakeholders, coupled with mounting ESG backlash, is prompting further scrutiny and transparency in reporting.
“Institutional investors want to ensure ESG considerations are not just a passing trend but a fundamental part of the investment process,” Cerulli analysts noted in the report.
Approximately 10% of asset owners surveyed said they scaled back ESG considerations into their investment decisions, owing to political pushback, including legislation “aimed at restricting the use of ESG factors in investment decisions.”
Among the institutions that said they scaled back the incorporation of ESG factors into investment decisions, a little more than a third (34%) attributed the action to the time-consuming and costly process of responding to the anti-ESG backlash, including the burden of navigating conflicting state laws.
Nearly a quarter (24%) of institutions that paused ESG considerations identified litigation as a “significant barrier.”
Reporting hurdles
A key challenge to greater transparency on ESG-related activities is a lack of standardized reporting guidelines and consistent standards, with many asset owners grappling with how to define ESG risks and impact across industries. “This lack of consistency makes it difficult for asset owners to compare ESG performance across their portfolios and make informed decisions,” the report said.
In addition, over one-third of asset owners (38%) cited the complexity of defining ESG boundaries — particularly when differentiating from impact investing — as a key challenge to reporting.
Cerulli said asset managers looking to meet asset owners’ demands for greater accountability and transparency on ESG activities should invest in “robust reporting systems” to satisfy such expectations.
The growing role of consultants
Owing to the complexity of ESG reporting, institutional investors are increasingly turning to external advice to guide ESG strategy and reporting. Over a quarter of asset owners (28%) said they currently rely on investment consultants to support their responsible investment strategies, and 13% said they plan to work with consultants for this purpose in the near future.
Consultants and outsourced chief investment officers play a key role in helping asset owners respond to the ESG backlash by helping them articulate benefits clearly, according to Cerulli. Consultants and outsourced CIOs also help asset owners stay informed of regulatory changes and keep reporting standards consistent, the report said.
Asset owners are also increasingly working with diverse asset managers that are owned or led by underrepresented groups. Some 39% of asset owners have hired diverse asset managers, and 35% said they are considering hiring diverse asset managers to oversee portions of responsible investing portfolios. Despite the importance of diverse managers, the proportion of assets allocated to them is low: Just over half (53%) of asset owners that hired a diverse manager allocated 10% or less of their portfolios to them.
Ongoing commitment to ESG
Despite the pressures on asset managers to offer transparency in ESG reports and political scrutiny, two-thirds (66%) of asset owners said they remain committed to responsible investing and will continue to integrate its principles into investment strategies. Asset owners are still challenged to align ESG values with fiduciary obligations, the report said.
Despite these headwinds, Cerulli’s outlook on the future of transparent and consistent ESG reporting is positive.
“As the regulatory landscape continues to take shape, investors, regulators, and industry groups should continue to collaborate to align on consistent disclosure frameworks,” Giuditta told ESG Dive. “Cerulli is optimistic that more global industry organizations such as the CFA institute will step up to address some of these challenges,” noting that earlier this year, CFA Institute introduced a new net-zero guide for asset managers and asset owners.
