Climate change dominates investors’ outlook, Stanford-MSCI Sustainability Institute survey finds

The world’s biggest institutional investors overwhelmingly say that climate change is likely to affect the performance of investments over the medium term, a survey by Stanford University’s Graduate School of Business and the MSCI Sustainability Institute finds.

Ninety-three percent of investors say that that climate issues are most likely to affect the performance of investments over the next two to five years, according to the survey of owners and managers of assets, a plurality (43%) of whom oversee more than USD 250 billion. At the same time, just 4% of investors say climate risks are mostly reflected in the price of financial assets, while three-quarters (72%) say such risks are somewhat reflected in asset values.

The biggest investors overwhelmingly see climate change as the sustainability issue most likely to affect the performance of investments in the next two to five years

Source: Stanford-MSCI Sustainability Institute survey

That contrasts with governance risks, which nearly two-thirds (63%) of investors say are mostly reflected in asset prices. Sixty-eight percent of investors say that the quality of companies’ governance is most likely to impact the performance of investments over the short term.

Overall, nearly two-thirds (63%) say that consideration of environmental, social and governance factors as part of investment decision-making offers a more holistic view of a company’s risk to support better-informed decisions. More than three-quarters (77%) of investors in North America and Europe alike say that integrating environmental, social and governance (ESG) criteria reduces the investment risks of unknown events, while 61% of investors overall say that ESG integration lowers volatility.

“Our survey shows that climate is the number one issue for the biggest investors in both the U.S. and Europe,” said Linda-Eling Lee, the Institute’s founding director. “At the same time, asset prices do not fully reflect climate risk, underscoring that the shift to a clean-energy economy is where the greatest risks and opportunities lie. Our survey further shows that investors all over the world are factoring financially relevant sustainability criteria into their decision-making.”

The survey arrives at a pivotal moment for sustainable investing. Consideration by investors of sustainability risks to their investments has received a wave of critical scrutiny amid high inflation, populist pushback and geopolitical volatility. More than 50 countries, including the U.S., the world’s second-largest emitter of greenhouse gases behind China, are slated to hold national elections this year that could shape the pace and breadth of the global transition to greener economy.

The survey shows that more than two-thirds (67%) of investors consider sustainability as a factor in shaping their strategies, with climate a central focus. Eighty-eight percent of investors in both North America and Europe are analyzing the emissions of their investments (88%), while 79% are investing in renewable energy and transition technologies and quantifying the possible impacts of climate risk (72%) according to respondents, a majority (60%) of whom serve as heads of divisions or research or as chief investment officers.

What impact do you believe a commitment to integrating sustainability criteria has on the performance of an investment?

Source: Stanford-MSCI Sustainability Institute survey

The findings detail regional differences. Nearly one-third (32%) of investors in Europe say they explicitly consider ESG factors as central to an investment decision, for example, compared with just 9% of investors in North America, where nearly three-quarters (73%) consider ESG as one factor out of many in decision-making. Fifty-nine percent of investors in every region say that ESG criteria are wither extremely important or very important in their overall investment decision process.

The survey underscores the importance that investors attach to companies’ governance as a constant. While companies’ carbon emissions lead the list of top ESG factors that investors say they explicitly consider, the structure of boards and ownership, board diversity, the quality of financial reporting and the independence of board chairs represent five of the top seven factors.

Climate change tops the list of sustainability factors that institutional investors say they explicitly consider in investment decisions

Climate change or carbon emissions
Board structure
Ownership structure
Board diversity
Quality of financial reporting
Data security and privacy
Independence status of chair

Overall, 68% of investors say that governance matters most in their investment decisions, compared with nearly one-quarter (23%) who rank environmental factors as most important and just 2% who say that social factors matter most. Still, more than half (57%) of investors rank the security and privacy of data (a social issue) as among the top ESG factors they explicitly consider.

More than three-quarters (77%) of investors say that ESG performance is industry-specific, while investors overwhelmingly (84%) say they would not consider investing in a company whose financial fundamentals alone would not make it an attractive investment, regardless of the company’s positive sustainability characteristics.

“Our survey shows that the largest institutional investors view sustainability through the lens of financial performance,” notes Rumi Mahmood, the Institute’s research director for EMEA. “Nearly every investor we surveyed would pass on an investment if the merits alone would not make it a good opportunity.”

The MSCI Sustainability Institute-Stanford survey of institutional investors was conducted by Stanford University’s Graduate School of Business, the Hoover Institution Working Group on Corporate Governance, and the Rock Center for Corporate Governance at Stanford via online panels from September to November 2023. The survey included interviews with senior decision-makers at 47 institutional investors in North America (49%), Europe (47%) and the Asia-Pacific region (4%).