A new survey offers a rare window into how the world's largest institutional investors think about environmental, social, and governance priorities
Large investors see ESG as a way of reducing volatility and risk in their portfolios.
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You probably know that ESG stands for “environmental, social, and governance.” Yet as far as most big institutional investors are concerned, the acronym should probably be changed to GCS, or “governance, climate, and social.”
That’s one of several striking findings from a recent survey that Stanford Graduate School of Business researchers David Larcker, Amit Seru, and Brian Tayan, MBA ’03, conducted with assistance from the MSCI Sustainability Instituteopen in new window.
The trio previously investigated how individual investors viewed ESG priorities. This time, the researchers explored how large institutional investors such as asset managers, pension funds, and insurance companies think about ESG factors when making investment decisions. Most of the 47 survey respondents are based in North America and Europe. Nearly half hold more than $250 billion in assets.
“These are not mom-and-pop investment shops,” says Larcker, a professor emeritus of accounting, co-director of the the Corporate Governance Research Initiative, and distinguished visiting fellow at the Hoover Institutionopen in new window. “They have serious money.”
Although European respondents are nearly three times more likely to operate under ESG mandates than their North American counterparts, there is a surprising degree of agreement between investors on both sides of the pond — along with some intriguing differences. Nearly half of all respondents say that ESG criteria play a very important role in their investment decision process. Most see ESG primarily as a way of reducing volatility and risk in their portfolios — especially tail risk, the probability that a rare but catastrophic event could tank a company’s performance.
This piece originally appeared in Stanford Business Insights from Stanford Graduate School of Business. To receive business ideas and insights from Stanford GSB click here: (To sign up: https://www.gsb.stanford.edu/insights/about/emails)