It’s official: Climate is now the #1 issue with investors

The largest institutional investors in every region are unequivocally paying attention to climate change, a survey published on Wednesday by Stanford University's Graduate School of Business and the MSCI Sustainability Institute finds.

Ninety-three percent of investors say that climate issues are most likely to affect the performance of investments over the next two to five years, according to the survey of institutional owners and managers of assets, a plurality (43%) of whom oversee more than USD 250 billion. Survey respondents comprise chief investment officers, heads of research and other senior executives.

Just 4% of investors, however, say climate risks are mostly reflected in the price of financial assets, underscoring both the risks and opportunities that accompany the shift to a greener global economy. That contrasts with governance risks, which nearly two-thirds (63%) of investors say are mostly reflected in asset prices.

The survey, fielded by researchers at Stanford’s Hoover Institution Working Group on Corporate Governance and Rock Center for Corporate Governance in collaboration with the Institute, shows that the lion’s share of global investors consider sustainability either at the center of their decisions or as a factor in shaping their strategies. The survey also highlights three realities of how investors approach sustainability.

Investors on both sides of the Atlantic view sustainability more similarly than you may think. Overall, nearly two-thirds (63%) of investors in both regions say that consideration of environmental, social and governance (ESG) factors as part of investment decision-making offers a more holistic view of a company’s risk to support better-informed decisions. Respondents, roughly half (49%) of whom are headquartered in the U.S. and 47% in Europe (with the remainder in the Asia-Pacific region), view sustainability in the context of performance; most (77%) say that ESG performance is industry-specific. More than three-quarters (77%) of investors in North America and Europe alike say that integrating sustainability criteria reduces the investment risks of unknown events, while 61% of investors overall say that ESG integration lowers volatility.

The financial significance of sustainability risks vary with time. The lion’s share (76%) of investors say that governance risks are most likely to affect the financial performance of assets in the next two years, compared with 59% of investors who point to environmental risk and 30% who cite social risks as the biggest near-term concerns. The finding echoes research in which we have found that governance showed more significance than other issues on financial fundamentals over the next year, while the contribution of environmental and social issues to stock-price performance have unfolded over multiple years.

Investors are paying attention to both the risks and opportunities of a changing climate. Eighty-eight percent are analyzing the emissions of their investments; investing in renewable energy and transition technologies (79%); and quantifying the possible financial impacts of climate risk (72%). Nearly 80% of investors cite climate change and carbon emissions as the environmental factor they explicitly consider in the process of investment decisions, compared with just under half (48%) of whom consider corporate net-zero pledges or the sustainability of supply chains (46%).

You can read more findings on the Institute’s website.

Sustainable investing is a noisy space, which is why it’s critical to bring data and evidence to ground the discussion. It’s great to see the results of this survey of senior investment practitioners. Their responses add to a body of research that fiduciary-minded investors are scanning the horizon for emerging risks and opportunities. Even as they now routinely price in governance issues in their calculus, the greatest looming risks and opportunities stem from our changing climate.