Asset owners are rethinking their global asset allocation amid a disrupted world order, according to Morningstar’s fourth annual quantitative survey of asset owners. This includes a notable pivot away from U.S. assets driven by policy uncertainty and currency risk.
Global allocators are also moving further into private assets and, despite pushback and controversies, are still demonstrating a steadfast, albeit more nuanced, commitment to ESG.
After surveying more than 500 global asset owners with $19 trillion in combined assets, Morningstar found that four in 10 are either reducing or plan to reduce their allocation to the U.S. in direct response to the tumultuous geopolitical and regulatory landscape.
More than three-quarters of asset owners (76 percent) viewed increasing trade disputes as material to their investments. When asked which geopolitical issues impacted their investments most in the last year, 73 percent cited the current U.S. administration and 62 percent cited U.S. dollar weakness.
The allocators’ response to geopolitical uncertainty went “beyond short-term noise,” according to Morningstar’s head of institutional investor solutions Paul Schutzman.
“There’s enough risk there that’s influencing investment decisions and therefore a trend worth watching,” he said, adding that the decision to decrease U.S. allocations was largely tied to “the risk associated with issues around tariffs, policy uncertainty, [and] volatility of the U.S. dollar.”
The survey also highlighted a continued move into private assets. The average global allocation to private markets is currently 20.5 percent and is expected to grow to 22.6 percent over the next five years, a trend that was consistent across all regions.
Artificial intelligence was also flagged as a material issue, though not primarily for its potential to drive investment returns. Instead, asset owners are most focused on AI’s ability to improve operational processes, such as data access and automated processing.
ESG: Under Fire but Still Standing
The other major theme that came out of the survey results is the evolving state of ESG investing. Despite significant political headwinds and controversy, particularly in the U.S., the majority of asset owners globally are sticking with the label “ESG” for consistency.
The data shows that 69 percent of respondents will continue to use the term going forward, with support highest in Europe (73 percent) and APAC (68 percent). Even North America still had a majority using the term at 61 percent. “The consistency is outweighing the controversy,” Schutzman said.
This commitment is underpinned by a growing belief in the materiality of ESG factors and their connection to fiduciary duty. Globally, 61 percent of asset owners said ESG considerations go “hand-in-hand with my fiduciary duty,” an eight-percentage-point increase from 2024. Nearly six in ten (58 percent) believed ESG materiality has increased over the past five years.
However, a stark divide is evident. The U.S. is the only market surveyed where there is an “ESG materiality deficit” — more respondents felt ESG has become less material (34 percent) than those who believed it has become more material (30 percent). “Clearly we can see something happening across the U.S. market versus other markets,” Schutzman said.
On climate issues, asset owners are pushing for more sophisticated strategies. The most material environmental factors cited were climate transition readiness (56 percent), energy management (48 percent), and physical climate risks (42 percent). In addition, carbon footprinting was found to be on the rise, with half of the surveyed allocators now measuring it to promote transition readiness.
Those accounting for climate transition were far more likely to favor engagement to spur real-world emissions reductions (47 percent) over simply decarbonizing their portfolios (29 percent).
This push for sophistication coincides with a desire for more regulatory clarity around ESG issues. Globally, 55 percent of asset owners considered ESG regulations a help, more than double the 27 percent who saw them as a hindrance. Furthermore, recent regulatory rollbacks were seen as a step in the wrong direction by 46 percent of respondents, compared to just 27 percent who believed they were a step in the right direction.
Support for standardized frameworks as a helpful feature of ESG regulations jumped to 61 percent, up 15 percentage points from 2023, indicating a strong industry push for consistency to help navigate an increasingly complex investing environment.
