Sustainable investing based on environmental, social and governance (ESG) aspects has quickly change into a central aspect of our investment behavior. Investors are demanding more from their asset managers: they need to speculate based on their values and demand more accountability from corporations in tackling evolving societal problems.
In fact, the most recent version of the Index Industry Association (IIA) Annual benchmark survey found that the variety of ESG indices has increased by 40% in response to growing investor demand.
Sustainable investing was once a distinct segment strategy and policy, but today it’s on the helm of world investment trends. The asset managers answerable for assembling and managing global ESG portfolios, by definition, determine which corporations meet ESG investment standards.
But investors want more answers. They need to know what it takes to take ESG investing to the subsequent level. Who sets ESG standards and the way are they measured across globally rated corporations? How do asset managers determine which corporations meet these standards and warrant inclusion in investment portfolios? Or conversely, how do they resolve which corporations lack the ESG credentials required for inclusion?
To higher understand the most important challenges and opportunities within the ESG market, Index Industry Association (IIA) The aim is to evaluate how asset managers perceive ESG investments. In early 2021, we commissioned a survey of 300 asset management firms in 4 major economies — France, Germany, the United Kingdom and the United States. The survey questions were designed to search out out more concerning the aspects influencing global asset managers’ ESG investment decisions, the perceived challenges and barriers on this market and the way asset managers view the long run of ESG investing.
More broadly, the survey results confirmed a few of the more obvious trends in ESG investing. There is little question that ESG is a really high priority for global asset managers and can likely remain so over the approaching decade.
85% of the 300 asset managers surveyed say ESG is a priority for his or her firms. They expect the extent of portfolio investment in ESG to extend significantly in the approaching years, with the share of ESG assets expected to rise from 26.7% in 12 months to 43.6% in five years. And this rapid growth just isn’t happening in a vacuum. It is being driven by growing global demand for more ESG-friendly investments.
Prioritizing ESG across your organization’s overall investment offering or investment strategy
While there are differences across countries, our findings confirm that ESG is a “big issue” and plays a serious role in global asset managers’ formulation of investment strategies and resource allocation. This is nice information, but not exactly groundbreaking.
After moving beyond the “Captain Obvious” portion of our survey and delving deeper into the mindset of those asset managers, we higher understood the actual challenges – and likewise the opportunities – of ESG investing.
The first challenge that stood out clearly to us is data-related. High-quality data on corporations’ ESG performance is critical, but ESG measurement remains to be an evolving and imperfect science. Our survey showed that despite growing enthusiasm and acceptance of ESG approaches, there are still large gaps in the amount and quality of ESG information available to investors.
To what extent do the next points pose a challenge for ESG implementation in fund and asset management?
Sixty-three percent of asset managers surveyed by the IIA cited an absence of quantitative data as a serious (24 percent) or moderate (39 percent) challenge to ESG implementation. And 64 percent cited an absence of transparency or inadequate disclosure of an organization’s ESG activities as one other obstacle.
And this issue goes beyond data. Our survey underscored the indisputable fact that there is no such thing as a common global consensus on how ESG performance needs to be defined and measured.
This just isn’t as a consequence of an absence of actual ESG metrics. A dizzying variety of market data providers and industry bodies each take their very own approach to measuring ESG. This leads to a hodgepodge with little consistency across markets and metrics. Often, different providers have wildly different views on a single stock, and industry observers and the news media haven’t hesitated to spotlight these conflicting reports.
Impact of regulation
Another related challenge is to prescribe consistent policies and frameworks for the rapidly growing ESG investment world. While our survey shows that global asset managers largely trust regulators to implement standards on this area, in addition they see little consistency across markets and regulatory systems. 56 percent of survey respondents say they struggle to maintain up with ESG regulations, 65 percent think regulators must pay more attention to the asset management industry’s views on ESG issues, and 78 percent agree that we’ll see more ESG regulations for the asset management industry in the subsequent few years.
What’s next? I wish I had a crystal ball to let you know what the ESG investment landscape will seem like in 10 years, and even five years. What makes this space so fascinating is that it remains to be evolving so quickly and would require software updates to ESG’s metaphorical global positioning system (GPS).
Even the ESG concept itself is evolving. In the past, ESG aspects “E” (environmental) and “G” (governance) have been relatively well addressed, however the S (social) factor remains to be in the event phase. Society is undergoing rapid changes, and these changes will not be viewed from the identical perspective in all countries and regions. Flexible standards that may take these differences under consideration might be critical for future ESG growth.
Market indices have done an excellent job lately of keeping pace with developments within the ESG industry and developing index measurement tools that help investors evaluate ESG markets and issuers and higher implement their ESG investment strategies. Better company data enables higher ESG benchmarks, which enables asset managers to higher spend money on investors’ ESG mandates.
Our survey of asset managers supports this point, but more importantly, underscores that we still need a more accurate GPS.
This is the fourth a part of a series from the Index Industry Association (IIA).
If you liked this post, don’t forget to subscribe.
Photo credit: ©Getty Images/Tsuji
