Moving the Dial:

U.S. Investors Warm to ESG

Environmental, social, and governance (ESG) strategies are quickly evolving in
multiple dimensions of the institutional investment arena. In this charticle, Callan
looks at ESG from two different perspectivesU.S. asset owners and global real
estate managersto see how they are addressing these issues. We highlight key
findings from our two independent surveys: one examines U.S. investor incorporation of ESG factors, and the other explores how the largest global real estate
managers are addressing ESG considerations.

We conducted our second survey of U.S.-based asset owners in September 2014

to assess the status of responsible and sustainable investment strategies in the
institutional market. We present select findings from 211 unique institutional funds
in the U.S., representing approximately $1.4 trillion in assets. This survey updates
results of our 2013 survey, revealing the dial is moving toward ESG incorporation.

Have you incorporated ESG factors into your investment decisions?

Our latest survey results reveal ESG incorporation rates increased from 22% in 2013 to
26% in 2014 among U.S.-based institutional investors. Eleven percent of respondents that
40%

have not incorporated ESG are considering doing so, up slightly from 2013 (9%).
By fund type, endowments made big strides relative to 2013 to claim the highest

30%

rate of ESG adoption, followed by foundations. Public fund usage of

2014 26%

15

20

%
14

13

20

14

2013 22%

20%

14

2014

15

22%

13

20

13

20
20

10%

ESG factors jumped 7% in a year, but corporate funds were flat.

22%

2013
30%

10

Found
atio
n

0%

Endowm
ent

Corporate

Public

0% Corporate
Public
27%
Endowment
Foundation
0%

We expect to achieve an improved risk

profile without sacrificing return

We expect to achieve higher risk-adjusted

returns over the long term

My fund must consider ESG factors as

part of our fiduciary responsibility

ing ESG factors a part of investment decision

making. Industry proponents will need to communicate to U.S. investors an articulate, relatable description of the value proposition
including how using ESG factors can bolster

50%

My fund has other goals besides maximizing

risk-adjusted returns, and we believe that ESG
factors can help us attain these other goals

see a concrete tie to outperformance before mak-

35%

YES

Top 5 Reasons for Incorporating ESG (by fund type)

The fund's Investment Policy Statement
dictates that we consider ESG factors

tion, consistent with a year ago. Many would like to

40

YES

decision making are still unclear on the value proposi-

2014 31
%

20%
0%

Funds that have not incorporated ESG into investment

34%

returnsto win over new investors.

Top 5 Reasons for NOT Incorporating ESG

I have not seen ample research

tying ESG factors to outperformance

27%

45%
45%

27%
33%
36%

9%
9%
11%
9%

44%

My fund will not consider any factors

that are not purely financial in our
investment decision making

44%
45%

9%

57%

It is unclear what the value proposition is

55%
55%

43%

I dont know how ESG factors would fit

in the fund's strategic asset allocation

26%

My fund does not have the time and/or staff

resources to devote to exploring this area

26%

45%

18%
0%

60%

U.S. Investor Views on ESG

Strongly agree

Agree

No opinion

Disagree

Strongly disagree

Engagement is more effective than divestment

Financial outcomes aside, ESG investing can have a substantial positive
impact on humanity (society, environment, etc.)
Considering the sustainability of the environment
is part of a fiduciary's duty
Overall, ESG factors are just as important as traditional fundamental factors
(e.g., profitability and valuation) when evaluating companies
ESG investing can most likely enhance long-term returns
ESG investing is a short-term trend
ESG investing might work in other countries,
but the U.S. market will never embrace it

0%

20%

40%

The full results of this survey are available to Callan clients at: http://www.callan.com/research/surveys

60%

80%

100%

How Are the Largest Global Real Estate Managers Addressing ESG?
Real estate carries a particularly heavyand measurableenvironmental footprint compared
to most other asset classes. Many investment managers are implementing sustainability practices that mitigate the negative impacts of their real estate operations while enhancing returns

of respondents
have experienced
increased emphasis
on ESG issues in
the last five years,
both internally and
from clients.

and preserving value. The focus on sustainability within the real estate industry is not altogether altruistic. Incorporating sustainable practices can directly benefit asset-level performance
through cost savings. Additionally, many investment managers believe that sustainable properties appeal to a broader and more attractive tenant and buyer pool. Investment managers have
intensified efforts to incorporate sustainable practices into their management practices, investment strategies, and organizational culture.
In 2014, Callan surveyed 17 of the largest global real estate investment managers to understand
how they are addressing ESG considerations. Respondent firms collectively manage more than
$600 billion in real estate assets. Survey results reveal that the movement toward increased
emphasis of ESG principles is unanimous, though degrees of awareness and incorporation vary.

Percent of survey respondents that:

Have a committee or taskforce dedicated to ESG issues

82%

Have policies and/or guidelines in place to implement an

ESG philosophy within real estate investment activity

82%
59%

Are a UN PRI Signatory

41%

Have dedicated staff to address ESG issues

Do you participate in the Global Real Estate

Sustainability Benchmark (GRESB) Survey,
and/or pursue investment property-level
certifications from LEED or Energy Star?
100%

94%

re

r mo
o
e
n
se o
u
u
o
ks?
r
a
Do y
m
h
benc
G
S
E
60%

82%

82%

80%

More than 80% of the largest global real estate

managers have a committee and/or taskforce
dedicated to ESG issues, and have policies/
guidelines to implement an ESG philosophy.
More than half (59%) of these firms are signatories of the UN Principles for Responsible
Investment, and 41% have dedicated staff to
address ESG issues.

59%

50%
40%

60%

30%

24%
18%

20%

40%

12%

12%

12%

Greenprint

Global
Reporting
Initiative
(GRI)

None

10%
20%

0%

0%

GRESB Annual
Survey
Participant

LEED
Certification
Program

Energy Star
Certification
Program

GRESB

Energy
Star

Other

Measuring, reporting, and benchmarking sustainability practices and results

have become major initiatives over the last five years for nearly all of the
investment managers surveyed. Reporting can take many forms, and begins

The Leadership in Energy & Environ-

The Energy Star ratings system from

mental

certification,

the U.S. Environmental Protection Agency

sponsored by the U.S. Green Building

enables participants to reduce property-level

Council, is among the most popular

energy consumption and costs through the

certification programs in the U.S. The

implementation of sustainability practices in

LEED certification focuses on key envi-

the institutional real estate realm and home-

ronmental factors, including sustainable

owner programs and products. Energy Star

site development, water savings, energy

certifications indicate superior energy effi-

efficiency, materials selection, and indoor

ciency for commercial buildings and develop-

environmental quality to reach one of four

ments and industrial plants. The Energy Star

certification levels: basic, silver, gold, or

rating indicates that a property is among the

platinum.

top 25% of similar buildings within the U.S.

Design

(LEED)

Global Real Estate Sustainability Benchmark (GRESB) is a participant-driven benchmarking

system that measures sustainability performance across real estate strategies. The GRESB

with tracking asset-level data. Several managers have begun publishing internal annual reports that highlight the results of their sustainability practices.
The majority (91%) of real estate investment managers use sustainability
benchmarks to measure their efforts.
The full results of the survey are available to Callan clients in our white paper
Real Estate Grows Greener by Sarah Angus, CAIA, available at
http://www.callan.com/research/papers/

San Francisco

Atlanta

Chicago

800.227.3288 800.522.9782 800.999.3536

survey tracks information on energy consumption, greenhouse gas emissions, water and waste

Denver

New Jersey

use, property-level sustainability certifications, and organizations internal efforts to promote and

www.callan.com 855.864.3377 800.274.5878

maximize sustainability.
October 2014 | 2014 Callan Associates Inc.