ESG as a component of asset management is in the spotlight as investors’ desire to prioritize environmental, social and governance issues gains traction. A recent FT Adviser article asserts that the “ESG trend is changing asset management” – not an unreasonable statement when you consider that sustainable investment funds more than doubled in 2020, seeing $51.1 billion of net new money from investors.
With sustainable indices shown to have out-performed their counterparts during the downturn caused by the pandemic, it’s not surprising that ESG in asset management is attracting headlines.
Potential shareholders intrigued by this out-performance are seeking ESG-friendly investments. In tandem, organizations are asking how they can capitalize on the growing popularity of sustainable investment.
What Is ESG in Asset Management?
There can be a misconception that ESG is just about environmental sustainability. And while this is clearly central, ESG is broader than that. It covers corporate governance – the “G” in ESG – alongside issues ranging from executive compensation to sustainable supply chains.
When it comes to asset management, ESG integration is all about incorporating these factors into an investment strategy, ensuring that ESG considerations are embedded in asset managers’ investment approaches. From a corporate perspective, ESG factors are increasingly germane to your attractiveness as a possible investment.
What Is Driving the Trend of ESG Investing?
Why are ESG factors important? Law firm Norton Rose Fulbright sees ESG as an increasing focus for asset managers. This is because of the “direct risk (climate-related disasters impacting commodities and global economies) and indirect risk (changing consumer preferences and increasing scrutiny and pressure by governments and regulators)” they face from ESG factors.
Addressing these risks positions companies better to withstand challenges and mitigate the risks posed by ESG-related issues. A few specific stimuli are driving the increased pace of ESG investment:
- The pandemic – and not just because of financial volatility, although this did allow ESG-focused investments an opportunity to showcase their resilience. Before 2020, ESG priorities in asset management were already on the rise, as investors started to recognize the value of non-financial risks such as climate change, diversity and inclusion, and ethical supply chains. The coronavirus pandemic accelerated this trend, overlaying these concerns with a recognition that disaster recovery and business continuity planning and the ways organizations treated their employees at times of crisis are as crucial to a business’s ESG credibility as the make-up of their board or ecological promises.
- Evidence that ESG investments are particularly resilient during market volatility. Investment research firm Morningstar reported that 51 out of 57 of their sustainable indices out-performed their broad market counterparts in the first quarter of 2020, while MSCI found that 15 of 17 of their sustainable indices did the same. This supports longer-term findings from investment managers BlackRock that sustainable strategies “have important resilient properties.”
- A growing focus on ESG as a criterion for investors. ESG ratings and scores from third-party rating and reporting organizations form an increasingly central element of investor due diligence. As Harvard Business Review notes, shareholders are getting serious about sustainability, echoing 2019 research by risk management firm Aon in 2019, which found that responsible investment was at least somewhat important to 85% of institutional investors.
- External pressure from industry bodies and other influencers. Industry bodies are increasingly putting their weight behind ESG-prioritized asset management. Chris Cummings, CEO of the UK-based Investment Association, stated in November 2020 that: “As stewards of the economy, investment managers have an important role to play in guiding the companies we invest in towards a more sustainable future.”
- Political imperatives. With a change of US administration comes a change of focus: President Biden is making climate change a priority area, and where political will leads, regulation and legislation tend to follow. Wise corporates are getting ahead of the game by turning their ESG aspirations into actions.
ESG Risks: What Today’s Boards Need To Know
Why ESG Is Good For Business
Ratings and scores predicated on ESG performance may be proliferating, but investors are still struggling to identify the winners and losers on sustainability and ethics. Companies that clearly articulate their achievements will command a lead over their competitors here.
There may be a degree of fatigue regarding the pandemic and its impacts, but its connection to ESG issues cannot be denied. In purely financial terms, the resilience displayed by ESG investments and outlined above makes a strong case for upping investor focus on ESG in asset management.
More broadly, the pandemic underscored the centrality of commercial businesses to the wider world. Like Ford Motor Company, GE and 3M partnered to manufacture medical supplies, and numerous other businesses stepped up their philanthropic initiatives, the lines between capitalism and social enterprise have increasingly blurred.
Andrew Howard, head of sustainable research at UK asset manager Schroders PLC notes that “social and environmental challenges, and investment drivers, are increasingly overlapping.” The intangible impact of actions like this on organizations’ reputation and, resultingly, their desirability as an investment, supplier or business partner cannot be under-estimated.
These factors combine to make organizations a better investment option, a more desirable partner and a more attractive supplier – provided they can articulate and evidence their ESG credentials.
How Organizations Can Tap Into the Trend for ESG Investment
As potential shareholders increasingly focus on ESG in their investment decisions, how can businesses capitalize on this interest? It’s undoubtedly possible, but there are some challenges:
The ESG landscape is complex and ever-evolving. Priorities, legislation and regulation change. Organizations need to take an organized and methodical approach to ESG factors if they’re to stand a chance of keeping pace.
Gaining a clear and comprehensive view of ESG performance can be tricky. Companies need a clear view of their structure and ESG performance if they want to keep on top of current priorities. The increasingly complex structures of many global organizations, made up of numerous legal entities across geographies, complicates this.
Companies find it difficult to demonstrate their ESG achievements. While many have got to grips with communicating the value of ESG internally and encouraging senior leaders to embrace ESG metrics, articulating this externally can still be a challenge.
ESG data can be difficult to access and aggregate for many businesses – but is vital in getting over a common hurdle; investors and customers find it difficult to identify ethical companies with any degree of accuracy. A historical absence of consistent ESG reporting frameworks exacerbates the problem, making it difficult for potential investors to assess how well organizations perform.
While the lack of consistency in reporting is partially addressed by initiatives like the TCFD and the UN’s Principles for Responsible Investment, the data issue persists. Smart companies seek out ESG solutions that can help them capture, organize and report on their ESG performance and address the data challenges.
Use ESG Data to Capitalize on ESG in Asset Management
Organizations’ increasing adoption of ESG principles is a positive for many reasons. The challenges faced by many in measuring and tracking their ESG objectives and progress cannot be ignored – but by identifying and breaking these obstacles down, corporates are better-placed to overcome them.
The trend for ESG investing is an opportunity for organizations that take a proactive approach to ESG. Making your organization a more attractive investment option demands a structured approach to environmental, social and governance initiatives and clear reporting and evidencing of your ESG performance.
Diligent’s ESG Solutions help organizations meet their ESG obligations, support them in complying with external standards and regulations, evaluate risk controls, benchmarking governance practices, and engage leadership with the latest frameworks and developments. Find out more about our ESG Solutions and how they could help your organization to tap into the trend for incorporating ESG into asset management.
Learn More About Diligent’s ESG Solutions
Learn how Diligent’s ESG solutions are helping companies operationalize ESG principles, track progress against standards, and monitor stakeholder sentiment.