Active Ownership, Growing Materiality & Data Demand Drive ESG Implementation for Asset Owners

Morningstar's third annual global asset owner survey finds ESG materiality broadening, active ownership rising and demand for improvements in ESG data growing.

Morningstar, Inc. (NASDAQ:MORN), a leading provider of independent investment insights, today published findings from its third annual Voice of the Asset Owner survey, showing expanding perception of ESG materiality across markets and factors, active ownership and direct engagement on ESG topics and a push for more granular data to support ESG-related investment and reporting needs.

The global quantitative survey, conducted by Morningstar Indexes and Morningstar Sustainalytics, included 500 asset owners (AOs) across 11 countries in North America, Europe and APAC with combined assets of approximately $18 trillion. Participants included pension funds, insurance general accounts, outsourced CIOs (OCIOs) and family offices, with six in 10 managing more than $1 billion and over a quarter (29%) managing $10 billion plus. Questions covered investment approach, ESG materiality, perspectives on implementation and the quality of data, ratings and indexes.

Thomas Kuh – Head of ESG Strategy, Morningstar Indexes, said: "Findings from our third annual Morningstar Voice of the Asset Owner Survey reaffirm many of our historical observations while uncovering areas of notable change for this important cohort. ESG materiality, still strong, is broadening and deepening while fiduciary duty continues to be driven by financial materiality. In addition, active ownership is alive and well, with direct engagement considered the most impactful tactic. Also, notably, while asset owners continue to use ESG data, ratings and indexes to implement their strategies, they increasingly recognize data as the most useful."

ESG Materiality – The Compounding Effect.

• More than two-thirds of AOs surveyed (67%) say ESG has become more material in the past year, with an average of 42% of AUM incorporating ESG factors, a four percentage point increase since 2022. Europe is the major driver, increasing from 36% in 2022 to 45% in 2024.
• While climate is still king and continues to grow (+12 percentage points in the last year), ESG has moved beyond just "E" in the eyes of AOs, with significant materiality increases for Social (+20 percentage points) and Governance (+12 percentage points).
• Climate transition readiness remains the most material Environmental factor, with labor practices and business ethics headlining material concerns for Social and Governance, respectively.

Fiduciary Duty – Driven by Financial Factors, Influenced by ESG Considerations.

• Financial considerations outweigh societal implications for AOs, with 72% considering single materiality relevant as compared to 59% for double materiality. As AUM increases, the percentage selecting "very relevant" for double materiality increases, suggesting that larger AOs view themselves more as universal owners & are more likely to consider the broader impact of their investments on the world.
• More than half of AOs (53%) feel ESG considerations go hand-in-hand with the fulfillment of fiduciary obligations.
• When it comes to incorporating ESG considerations, nearly eight in 10 (78%) view active ownership as useful in driving the implementation of their ESG programs. The general consensus is that proxy voting is the least effective method of active ownership, while direct engagement with companies ranked as the most important and effective tactic across all regions.

ESG Market Maturity Brings a More Focused Set of ESG Data Demands.

• When asked to choose whether ESG data, ratings or indexes are the most valuable component for implementing an ESG strategy, 43% selected ESG data, as compared to 24% selecting ESG ratings and 23% selecting indexes as most valuable. One of two AOs surveyed in the UK (50%), Germany (52%) and China (50%) selected data as the most useful tool for ESG implementation.
• While an increasing percentage of AOs surveyed believe ESG ratings, data and indexes have improved over the last five years, they are still looking for increased accuracy and more standardized, relevant reporting (cited as a barrier over the past two years). AOs hold a range of key stakeholders such as ratings agencies, regulators and index providers accountable for driving improvements.
• AOs are excited about the potential impact of artificial intelligence, or AI, on ESG data provision, with more than seven in ten hoping AI adoption will increase in the next five years to help drive innovation in data collection, ESG analysis, ESG reporting, portfolio construction & index creation.

"As stewards of influential pools of global capital, asset owners take their fiduciary duties very seriously, and our survey findings underscore that," said Paul Schutzman, Head of Institutional Solutions for Morningstar. "Notably, asset owners are asking for more granular ESG data to help support a broad range of ESG-related challenges."

Arnold Gast, ESG Research Director at Morningstar Sustainalytics, remarking on the broadening and deepening of ESG materiality for asset owners, said "the expanding scope of ESG investment demands has raised the bar for ESG research providers. Asset owners need more holistic and extensive ESG quantitative metrics and qualitative analysis."

About Morningstar Indexes and Morningstar Sustainalytics

Morningstar Indexes and Morningstar Sustainalytics are aligned to provide a more holistic and robust ESG offering to Morningstar clients. This growing collaboration includes ESG-related products, insights and research.

As the fastest-growing global index provider for the last three years according to Burton-Taylor International Consulting, Morningstar Indexes was built to keep up with the evolving needs of investors—and to be a leading-edge advocate for them. Morningstar's rich heritage as a transparent, investor-focused leader in data and research uniquely equips Morningstar Indexes to support individuals, institutions, wealth managers and advisors in navigating investment opportunities across all major asset classes, styles, and strategies. From assessing risk and return with traditional benchmarks to helping investors effectively incorporate ESG objectives into their investment process, our range of index solutions spans an investment landscape as diverse as investors themselves. We help investors answer today's increasingly complex questions so that they can more easily reach tomorrow's goals. Please visit indexes.morningstar.com for more information.

Morningstar Sustainalytics is a leading ESG data, research, and ratings firm that supports investors around the world with the development and implementation of responsible investment strategies. For more than 30 years, the firm has been at the forefront of developing high-quality, innovative solutions to meet the evolving needs of global investors. Today, Morningstar Sustainalytics works with hundreds of the world's leading asset managers and pension funds who incorporate ESG information and assessments into their investment processes. The firm also works with hundreds of companies and their financial intermediaries to help them consider material sustainability factors in policies, practices, and capital projects. Morningstar Sustainalytics has analysts around the world with varied multidisciplinary expertise across more than 40 industry groups. For more information, visit www.sustainalytics.com.

About Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment insights in North America, Europe, Australia, and Asia. The Company offers an extensive line of products and services that serve a wide range of market participants, including individual and institutional investors in public and private capital markets, financial advisors and wealth managers, asset managers, retirement plan providers and sponsors, and issuers of fixed-income securities. institutional investors in the debt and private capital markets. Morningstar provides data and research insights on a wide range of investment offerings, including managed investment products, publicly listed companies, private capital markets, debt securities, and real-time global market data. Morningstar also offers investment management services through its investment advisory subsidiaries, with approximately $316 billion in AUMA as of June 30, 2024. The Company operates through wholly- or majority-owned subsidiaries in 32 countries. For more information, visit www.morningstar.com/company. Follow Morningstar on X (formerly known as Twitter) @MorningstarInc.

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