ESG: Full speed forward, with GPS

Sustainable investment based on environmental, social and governance (ESG) issues has quickly become central to how we invest. Investors are demanding more from their asset managers: they want to invest based on their values ​​and they are demanding more accountability from companies to address changing social issues.

Indeed, the most recent annual benchmark survey by the Index Industry Association (IIA) found that the number of ESG indices has increased by 40% in response to growing demand from investors.

Once just a specialized investment strategy and policy, sustainable investment has taken the lead on navigating global investment trends. Asset managers responsible for composing and managing the global ESG portfolio determine by definition which companies meet ESG standards for investment.

But investors want more answers. They want to know what is needed to take ESG investment to the next level. Who sets the ESG criteria and how are they measured for globally evaluated companies? How do asset managers determine which companies meet these criteria and guarantee inclusion in an investment portfolio? Or, conversely, how do they decide if a company lacks the ESG certification required for inclusion?

To better understand the major challenges and opportunities in the ESG market, the Index Industry Association (IIA) begins to evaluate how asset managers perceive ESG investments. We conducted a survey in early 2021 of as00 asset management companies in four major economies – France, Germany, the United Kingdom and the United States. The survey questions were created to find out more about the decision of ESG investors to invest in global asset managers, the perceived challenges and barriers in this market, and how asset managers can unveil the future of ESG investing.

Tile for the future of sustainability in investment management

At a basic level, the results of the survey confirmed a more pronounced trend of ESG investment. Undoubtedly, ESG is a very high priority for global asset managers and will probably remain so for decades to come.

Eighty-five percent of asset managers surveyed said ESG was a primary concern for their company. They expect that the level of portfolio investment in ESG will increase significantly in the coming years, with the proportion of ESG assets rising from 26.7% in 12 months to 43.6% in five years. And this rapid growth is not happening in a vacuum. It is being fueled by increasing global demand for more ESG-friendly investments.

ESG’s priority in your company’s overall investment proposal or strategy

Although there are differences across different countries, our results confirm that ESG is a “big deal” and much more in the minds of global asset managers because they formulate investment strategies and allocate resources. This is good information to know, but not exactly unfounded.

Once we begin to delve deeper into the thinking of these asset managers beyond the “Captain Clear” part of our survey, we understand more about the real challenges for ESG investments – as well as the opportunities.

The first challenge that sounds loud and clear is related to data. High quality data on ESG corporate performance is critical, yet ESG measurement is still an underdeveloped and incomplete science. Our survey found that under increasing excitement and adoption around the ESG approach, there is still a large gap between the amount and quality of ESG information available to investors.

Which of the following challenges challenge the implementation of ESG for funding and asset management?

Which of the following challenges challenge the implementation of ESG for funding and asset management?

The ty percentage of asset managers surveyed by the IIA identified a lack of quantitative information as a major (24%) or moderate (39%) challenge to ESG implementation. And 64% cited lack of transparency or inadequate corporate disclosure as another obstacle around an organization’s ESG activity.

And this problem goes beyond information. Our survey highlights the fact that there is no general global sensitivity to how ESG performance should be defined and measured.

Advertising Tiles for ESG and Responsible Institutional Investments Around the World: A Critical Review

This is not due to a lack of actual ESG matrix. A confusing array of market data providers and industry boards each has its own method of measuring ESG. This creates a hodgepodge with little consistency across markets and metrics. Often, different suppliers take polar opposites with a single stock, and industry observers and the news media have not hesitated to highlight these conflicting reports.

The effect of control

Re-survey results: Effects of ESG control

Another compelling challenge is the need for consistent guidelines and frameworks for the fast-growing ESG investment world. Although our survey indicates that global asset managers rely heavily on regulators to increase the value of this space, they also see little correlation between the market and the regulatory system. Ty percent of survey respondents said they were having difficulty complying with ESG regulations, 5% said regulators should pay more attention to the views of the asset management industry on ESG issues and %% agreed that we would see additional ESG regulation in the next few years in the asset management industry.

So where do we go from here? I hope I have a crystal ball that will tell you what the picture of ESG investments will look like in 10 years or even five years. What makes this region so attractive is that it is still evolving so fast and software updates to ESG’s metaphorical Global Positioning System (GPS) will be necessary.

Even the concept of ESG is evolving. Historically, ESG’s “E” (environmental) and “G” (governance) issues have been fairly well addressed, but the “S,” or social, factor still remains a work in progress. Society is going through rapid changes and these changes are not seen through the same lens in all countries and regions. Flexible values ​​that can incorporate these differences will be the key to the future of ESG growth.

Advertising tiles for climate change analysis in the investment process

Market indicators have done a good job in recent years to stay on top of ESG industry development and design index measurement tools to help investors evaluate the ESG market and issuers and better implement their ESG investment strategies. Improved corporate data will enable better ESG benchmarks, which will allow asset managers to make better investments in ESG mandates from investors.

Our Asset Managers survey supports this point but, importantly, we still need more accurate GPS.

This is the fourth installment in a series from the Index Industry Association (IIA).

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All posts are the author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed must not reflect the views of the CFA Institute or the author’s employer.

Photo Credit: © Getty Images / Suzy

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Rick Redding, CFA

Reef Redding, CEO of CFA, Index Industry Association (IIA), is the first trade group for independent index providers worldwide. Prior to his role at IIA, Redding served as Managing Director and in various senior positions as a pioneer in product innovation at CME Group.

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