Boutique asset management think tank New City Initiative (NCI) has found nearly double the amount of member firms are incorporating environmental, social and governance (ESG) factors into their portfolios compared to five years ago.
In its white paper, entitled The Evolution of ESG in Asset Management, the NCI found 90.5% of respondents include ESG in portfolios versus just 47.6% five years ago.
Furthermore, 90.4% of member firms surveyed said they either are or intend to sign up to the United Nations' Principles for Responsible Investment.
The key reason for the increase in ESG adoption, the paper found, was for risk management purposes, with 52.5% citing this, while 19.1% stating investor pressure and 19% highlighting return pressure.
Charles Gubert, head of regulation at NCI and author of the report, said investors are looking to use ESG as a tool to mitigate long-term risks from their portfolios.
"Stranded asset risk is one of those, whereby an asset is subject to a write-down or devaluation or simply becomes obsolete as a result of regulatory change or shifting consumer behaviour," Gubert commented.
"Organisations heavily dependent on pollutant energy sources as inputs of production are at risk," he continued. "Entities including asset managers, which own bonds or securities in such companies, could see the value of their investments sharply decline or wiped out if organisations do not factor such threats into their future business strategies.
"This is leading to greater investor engagement at companies, whose operating models are perceived to be vulnerable to such disruption."
Meanwhile, over half of respondents said they were concerned about the European Union's regulatory proposals regarding ESG inclusion.
Last year, the European Commission proposed asset managers' sustainable activities and considerations should be included in their fiduciary duties.
EC vice president Valdis Dombrovskis said: "On climate change, we are running out of time. The Titanic could not turn to avoid the iceberg at the last minute and we will soon be in a very similar situation."
In response to this, all members surveyed said ESG incorporation should be industry-led rather than driven by regulation.
The paper warned the EU's ESG reporting requirements need to ensure they do not contradict or duplicate existing obligations as this will "confuse clients".
The report said: "While NCI membership recognises the authorities should clamp down on asset managers distributing products under misleading ESG or sustainable banners when they are in fact nothing of the kind, it is crucial that regulation does not have any unintended consequences which could dis-incentivise asset managers from investing sustainably.
"NCI membership is unanimously opposed to ESG becoming an issue driven by regulators, instead preferring industry-led initiatives to support the development of sector standards."