Sustainable investing based on environmental, social and governance (ESG) factors has quickly become central to how we invest. Investors are demanding more from their asset managers: they want to invest according to their values and they are demanding greater corporate responsibility in the face of evolving societal issues.
Indeed, the most recent report from the Index Industry Association (IIA) Annual baseline survey found that the number of ESG indices increased by 40% in response to growing investor demand.
Once a niche investment strategy and policy, sustainable investing has taken the lead in global investment trends. Asset managers responsible for the composition and management of global ESG portfolios determine, by definition, which companies meet ESG investment standards.
But investors want more answers. They want to know what is needed to take ESG investing to the next level. Who sets ESG standards and how are they measured for globally rated companies? How do asset managers determine which companies meet these standards and justify their inclusion in investment portfolios? Or, conversely, how do they decide which companies lack the ESG credentials needed for inclusion?
To better understand the major challenges and opportunities of the ESG market, the Index Industry Association (IIA) aims to assess how asset managers view ESG investing. We commissioned a survey in early 2021 of 300 asset management companies in four major economies — France, Germany, United Kingdom and United States. The survey questions were designed to learn more about the factors driving ESG investment decisions of global asset managers, perceived challenges and barriers in this market, and how asset managers anticipate the future of ESG investing.
On a basic level, the survey results confirmed some of the most obvious trends in ESG investing. Without a doubt, ESG is a very high priority for global asset managers and will likely remain so for the decade to come.
Of the 300 asset managers surveyed, 85% say ESG is a top concern for their business. They expect the level of portfolio investment in ESG to increase significantly in the coming years, with the proportion of ESG assets increasing from 26.7% in 12 months to 43.6% in five years. And this rapid growth is not happening in a vacuum. It is fueled by the growing global demand for more ESG-friendly investments.
ESG priority in your company’s overall investment offer or strategy
Although there are differences between countries, our results confirm that ESG is a “big deal” and high on the minds of global asset managers when formulating an investment strategy. and allocate resources. It’s good information to know, but not really revolutionary.
Once we got past the “Captain Obvious” part of our survey and started to dig deeper into the thinking of these asset managers, we came to better understand the real challenges – as well as the opportunities – for the ESG investing.
The first challenge that resonated loud and clear concerns data. High-quality data on companies’ ESG performance is essential, but ESG measurement remains an evolving and imperfect science. Our survey showed that despite the growing popularity and adoption of ESG approaches, there are still significant gaps in the quantity and quality of ESG information available to investors.
To what extent do the following aspects challenge the implementation of ESG for fund and asset management?
Sixty-three percent of asset managers surveyed by The IIA identified a lack of quantitative data as a major (24%) or moderate (39%) challenge to implementing ESG. And 64% cited a lack of transparency or insufficient corporate disclosure about a company’s ESG activities as another barrier.
And this question goes beyond data. Our survey highlighted the fact that there is no common global consensus on how ESG performance should be defined and measured.
This is not due to a lack of actual ESG metrics. A dizzying array of market data providers and industry boards each have their own approach to measuring ESG. This creates a hodgepodge with little consistency between markets and metrics. Often, different vendors have opposing views on a single title, and industry watchers and the media have been quick to highlight these conflicting reports.
Imposing consistent guidelines and frameworks for the rapidly growing world of ESG investing is another related challenge. While our survey indicates that global asset managers have a high level of trust in regulators to advance standards in this area, they also see little consistency across markets and regulatory regimes. Fifty-six percent of survey respondents say they struggle to keep up with ESG regulations, 65% say regulators need to pay more attention to asset management industry views on ESG issues, and 78% agree that we will see additional ESG regulation of the asset management industry in the coming years.
So where do we go from here? I wish I had a crystal ball to tell you what ESG investing will look like in 10 years or even 5 years from now. What makes this field so fascinating is that it is still evolving so rapidly and software updates to ESG’s metaphorical Global Positioning System (GPS) will be required.
Even the very concept of ESG is evolving. Historically, the ‘E’ (environmental) and ‘G’ (governance) factors of ESG have been considered fairly well, but the ‘S’ or social factor remains a work in progress. Society is undergoing rapid changes and these changes are not perceived in the same way in all countries and regions. Flexible standards that can accommodate these differences will be essential for the future of ESG growth.
Market Indices have done a good job in recent years of staying on top of ESG industry developments and designing index measurement tools to help investors assess ESG markets and issuers and better implement their ESG investment strategies. Better corporate data will enable better ESG benchmarks, which will enable asset managers to better invest in investors’ ESG mandates.
Our survey of asset managers confirms this point but, more importantly, highlights that we still need a more accurate GPS.
This is the fourth installment in a series of Index Industry Association (IIA).
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All posts are the opinion of the author. As such, they should not be construed as investment advice, and the opinions expressed do not necessarily reflect the views of the CFA Institute or the author’s employer.
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