Despite economic volatility and political frictions, 81% of asset managers in the US, UK, Germany and France are placing much greater emphasis on environment social and governance (ESG) in their investment strategy over the past 12 months, according to the third annual Index Industry Association (IIA) survey.
New York based IIA, which represents the global index industry and its members, administers more than three million indexes covering a broad range of asset classes, including equities, fixed income, commodities and foreign exchange.
The survey polled 300 chief financial officers, CIOs and portfolio managers from the UK US. Germany and France. Assets under management ranged from less than $1 billion to over $1 trillion dollars.
The report found that ESG investing remains on course to reach almost half of portfolios in two to three years’ time, and 63% in 10 years. While that is on par with last year’s survey, it is a notable rise from the 52% two years ago,
To date the “E” in ESG, or environmental criteria, continues to dominate, with asset managers expanding their view on applicable environmental factors.
Seventy five percent of respondents stated that environmental factors should be prioritised over social or governance factors, but climate change/carbon footprint is no longer the only environmental consideration.
For the first time, natural resource usage or depletion was important to 42% while 39% highlighted sustainable supply chains and a similar number ranked the resilience of physical assets to climate change above greenhouse gas and carbon emissions.
However, social issues were becoming more critical with 62% incorporating societal factors in all or most portfolios, including 74% of US managers.
On the governance front, 41% paid special attention to fair business practices while accounting and transparency, and diversity among boards and leadership were mentioned by 39% and 35%, respectively.
Asset managers did not only broaden their view of ESG but also the range of asset classes. In the past, equities were the most popular but the IIA study showed that since its inception three years ago, commodities have risen most significantly – from 37% in 2021 to 62% today.
In addition, 55% of global asset managers expect to see the use of ESG factors in commodities increase dramatically or by a moderate amount over the next 12 months.
In terms of countries, the survey noted that the political headwinds are not stopping US asset managers from ESG investing.
The majority or 88% see ESG as an important part of their work while many expect ESG funds to account for half of portfolios within two or three years.
At the end of June, Republicans in the House of Representatives introduced a new bill – the Ensuring Sound Guidance (ESG) Act – which aims to restrict ESG investing in retirement funds.
This is the latest move by Republicans to reinstate Trump-era rule that were revoked by the Biden administration to allow ESG considerations in the investment processes of ERISA or retirement plans.
The proposed legislation places emphasis on the use of “pecuniary” or financial risk and return factors and minimises non-pecuniary elements such as environmental or social considerations.
The survey also covered resources and technology. It found that while the vast majority of asset managers view the available ESG tools and metrics as fairly or highly effective, challenges remain.
The lack of data standardisation across markets continued to be number one issue for 30% followed by insufficient quantitative data, 29%, and a lack of agreed ratings and methods by providers, 24%.
As for tech, analytics, Internet of Things, blockchain, artificial intelligence (AI ) and machine learning top the list as offering opportunities to improve the timing, depth and predictive content of ESG data and metrics.
The survey said that asset managers are especially attuned to the potential ESG applications of AI and machine learning. Almost half expect it to have the biggest impact on ESG measurement and reporting over the next two years.
©Markets Media Europe 2023
