ESG: Full speed, with GPS

Sustainable investment based on environmental, social and governance (ESG) factors has quickly become a central element of our way of investing. Investors demand more of their asset managers: they want to invest based on their values ​​and they demand more responsibility from companies to tackle changing societal problems.

In fact, the most current index from the Index Industry Association (IIA) Annual benchmark survey found that the number of ESG indices increased 40% in response to growing investor demand.

Once just a niche investment strategy and policy, sustainable investing has taken the helm to navigate global investment trends. The asset managers responsible for the composition and management of global ESG portfolios are, by definition, those who determine which companies meet ESG standards for investment.

But investors want more answers. They want to know what it takes to take ESG investing to the next level. Who sets ESG standards and how are they measured for companies that are evaluated globally? How do asset managers determine which companies meet these standards and ensure their inclusion in investment portfolios? Or, conversely, how do they decide which companies lack the ESG credentials necessary for inclusion?

To better understand the main challenges and opportunities in the ESG market, the Index Industry Association (IIA) set out to assess how asset managers perceive ESG investment. We commissioned a survey in early 2021 of 300 asset management companies in four major economies. – France, Germany, the United Kingdom and the United States. The survey questions were designed to learn more about the factors driving ESG investment decisions by global asset managers, the perceived challenges and barriers in this market, and how asset managers anticipate the future development of the ESG investment.

Tile for the future of sustainability in investment management

At a basic level, the survey results confirmed some of the most obvious trends in ESG investing. Without question, ESG is a very high priority for global asset managers and will likely continue to be for the next decade.

Of the 300 asset managers surveyed, 85% say ESG is a top concern for their companies. They expect the level of portfolio investment in ESG to increase significantly in the coming years, with the share of ESG assets increasing from 26.7% in 12 months to 43.6% in five years. And this rapid growth doesn’t happen in a vacuum. It is being driven by the growing global demand for more ESG-friendly investments.

ESG priority within your company’s overall investment strategy or offering

While there are differences between countries, our results confirm that ESG is a “big problem” and is very much on the minds of global asset managers as they formulate investment strategies and allocate resources. This is good information to know, but it is not exactly groundbreaking.

Once we get past the “Captain Obvious” portion of our survey and begin to delve into the thinking of these asset managers, we come to understand more about the real challenges, as well as opportunities, for ESG investing.

The first challenge that sounded loud and clear has to do with data. High-quality data on corporate ESG performance is critical, yet ESG measurement remains an imperfect and evolving science. Our survey showed that, short of the growing enthusiasm and adoption around ESG approaches, there are still large gaps in the quantity and quality of ESG information available to investors.

To what extent are the following aspects a challenge for implementing ESG for asset and fund management?

Table showing responses to To what extent are the following aspects a challenge for the implementation of ESG for asset and fund management?

Sixty-three percent of asset managers surveyed by IIA identified the lack of quantitative data as a significant (24%) or moderate (39%) challenge to implementing ESG. And 64% cited a lack of transparency or insufficient corporate disclosure around a company’s ESG activities as another obstacle.

And this problem goes beyond the data. Our survey underscored the fact that there is no common global consensus on how ESG performance should be defined and measured.

Advertising Tile for ESG and Responsible Institutional Investing Around the World: A Critical Review

This is not due to a shortage of actual ESG metrics. An incredible variety 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 times, different vendors have opposing takes on a single action, and industry watchers and the media have been quick to highlight these conflicting reports.

Impact of regulation

Results of the survey on the impact of ESG regulation

Another related challenge is demanding consistent guidelines and frameworks for the rapidly growing world of ESG investing. While our survey indicates that global asset managers rely heavily on regulators to push standards in this space, they also see little consistency between markets and regulatory regimes. 56% of respondents say they find it difficult to keep up with ESG regulations, 65% say regulators need to pay more attention to the asset management industry’s views on ESG issues, and 78 % agree that we will see additional ESG regulation. of the asset management industry for years to come.

So where do we go from here? I wish I had a crystal ball to tell you what the ESG investing landscape will look like in 10 years, or even five years. What makes this area so fascinating is how it continues to evolve so rapidly and the software for ESG’s metaphorical global positioning system (GPS) will need to be updated.

Even the very concept of ESG is evolving. Historically, ESG’s “E” (environmental) and “G” (governance) factors have been addressed quite well, but the “S” or social factor is still a work in progress. Society is undergoing rapid changes, and these changes are not viewed with the same lens in all countries and regions. Flexible standards that can incorporate these differences will be key to the future of ESG growth.

Announcement for the analysis of climate change in the investment process

Market indices have done a good job in recent years in keeping abreast of ESG industry developments and designing index measurement tools to help investors assess ESG markets and issuers and to better implement their ESG investment strategies. Better corporate data will enable better ESG benchmarks, allowing asset managers to better invest in 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 installment in a series of the 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, nor do the opinions expressed necessarily reflect the views of the CFA Institute or the author’s employer.

Image credit: © Getty Images / Tsuji

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Rick Redding, CFA

Rick Redding, CFA, is the CEO of the Index Industry Association (IIA), the world’s leading trade group of independent index providers. Prior to his role at IIA, Redding served as Managing Director and held various senior positions leading product innovation at CME Group.

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