Why Europe is Leaving the US Behind on ESG

North American investors continue to show less interest in taking action and adapting their portfolios in response to climate change in comparison to their European peers, according to a new survey from PGIM.

PGIM’s survey – conducted in partnership with Greenwich Associates – polled 101 major investors throughout North America, Europe, and Asia with greater than $3 billion in assets under management.

The survey found that 90% believe climate change is an important issue for their organization. However, among North American investors, only 47% actively incorporate climate change into their investment processes, compared to over 80% of investors in Europe.

“North American investors recognise that climate change is emerging as a material factor but are still in the early stages of adjusting their investment processes and allocations to account for this,” said Taimur Hyat, chief operating officer for PGIM.

“The big shift in climate change thinking in the US will come when investors recognize that incorporating climate factors into the investment process is essential for optimal risk-return decisions, regardless of whether you tilt towards ESG objectives or not.”

While over two-thirds of European and Asia-Pacific investors state they have integrated climate change into their investment process because it is the right thing to do, in North America, fewer than one in three investors share this view.

Even respondents who think climate change is a real and relevant problem say a lack of reliable data and analytic models makes it difficult to evaluate the impact on their portfolios.

“One of the primary causes of the action gap appears to be uncertainty about climate models and analytics,” said Davis Walmsley, Greenwich Associates head of client relationships. “This may be an area where better understanding and deployment of existing data and analytics may encourage more investors to incorporate climate change into their portfolios.”

Investors have also been hampered by changes in regulatory stances. The Department of Labor, for example, last year proposed new rules restricting the incorporation of responsible investment criteria in investment strategies, while the SEC has been cautiously open to discussion of such issues in recent months, following the election of President Joe Biden.

Just over half the institutions surveyed that have incorporated climate change into their investment process have started avoiding investments that might contribute to climate change, and about 40% are proactively pursuing investments that mitigate the impacts of climate change.

Meanwhile, many other study participants are in the process of analyzing climate-related risks and opportunities, assessing and identifying possible portfolio responses.

“The good news is that the trend line shows institutional investors around the world recognize the importance of climate change,” said Hyat. “They are building climate change into their investment processes and creating frameworks for evaluating both the impact of their investments on the climate, and the impact of climate change on their investments.”