2024 Institutional Investor Survey Finds Governance Issues and Climate Concerns Sway Decision Makers

A significant majority of large investors polled in a new survey say they consider environmental, social, and governance (ESG) concerns when determining which firms to invest in, but basic governance factors far outweigh environmental and social concerns in their calculus.

This is according to the 2024 Institutional Investor Survey on Sustainability, published through a partnership of the Hoover Institution Working Group on Corporate Governance, Stanford's Arthur and Toni Rembe Rock Center for Corporate Governance, and the Stanford Graduate School of Business. The survey was also conducted in collaboration with the MSCI Sustainability Institute.

In fall 2023, the report's authors polled decision makers within forty-seven investment institutions based primarily in North America and Europe and a handful located in Asia.

They found governance concerns largely supplant social factors or environmental considerations for institutional investors, with 68 percent of those surveyed saying governance was the main consideration, while 23 percent said environmental factors were key. Only 2 percent cited social factors, such as data security, diversity of leadership, and supply-chain labor practices.

When a firm's environmental stance is considered, it's largely to do with climate change and emissions performance rather than other measures such as overall pollution output or sustainable sourcing of input materials.

"While ESG integration has become mainstream, governance reigns supreme," coauthor Amit Seru, Hoover senior fellow and Steven and Roberta Denning Professor of Finance at the Stanford Graduate School of Business, wrote in the report. "Institutional investors rank governance factors as more important to an investment decision than environmental and social factors. At the same time, climate considerations have come to the forefront, with the largest investors believing overwhelmingly that climate change will impact their portfolios in the coming years."

Added David Larcker, Hoover distinguished visiting fellow and James Irvin Miller Professor of Accounting, Emeritus, at the Stanford Graduate School of Business, one of the three coauthors of the report, "Corporate governance is table stakes: All companies are expected to have it. Governance has been a topic of investment focus for a very long time and, while critically important, investors see governance quality as already embedded in asset prices."

"By contrast, despite believing in the impact of climate on portfolios, investors see climate risks as yet to be fully priced," Larcker continued. "Social factors appear to be largely unimportant for driving investment decisions."

On climate, 93 percent of investment leaders surveyed said "climate issues are most likely to affect the performance of investments over the next two to five years," when compared to other staples of ESG such as governance or other environmental concerns.

Within the scope of governance, respondents said bread-and-butter concerns such as the structure of a firm's board, the diversity of its board members, and the quality of its financial reporting were the most important factors they considered when deciding where to invest.

There were also significant differences in what investment decision makers were looking for dependent on which side of the Atlantic Ocean they were located.

While only 26 percent of North American investor respondents say they are explicitly bound under an investment mandate that compels them to consider ESG criteria, more than 70 percent of European respondents say they are bound by one.

Also, European respondents more heavily scrutinized the impact of climate change on a potential investment and the prospective firm's data security and privacy policies than did their North American counterparts.

Along with Seru and Larcker, the report was written by Brian Tayan of the Corporate Governance Research Initiative at the Stanford Graduate School of Business. The report can be downloaded here.

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