Asset managers may not be accessing the best liquidity available for their environment, social and governance (ESG) investing, which could impact their best execution obligations, according to a new report.
Nearly all (83%) of asset managers rely on traditional sellside relationships to source liquidity for ESG funds according to a study, ‘Redefining Value in ESG: The Myriad of Paths to the Summit.’ In contrast, using third-party data providers for investment strategy purposes frees up execution strategies to select the most appropriate liquidity available and this is likely to increase in significance as sustainable investing becomes more crowded.
A head of trading at a small US buyside firm said in the report: “ESG is now creeping into the broker selection process. A number of US pension funds now require us to trade with women minority brokers.”
The report is the final in a three-part series on trends in European markets commissioned by FIA EPTA, which represents Europe’s leading principal trading firms. Redlap Consulting conducted interviews with 35 industry participants including ESG specialists, portfolio managers and heads of trading at asset managers along with liquidity providers, exchanges and ESG data providers.
Two-thirds (65%) of respondents now embed ESG factors as part of their investment process across all funds, with a third of respondents only offering separate ESG funds. The study also found that growing public appetite for more sustainable investment is being held back by traditional approaches to investment and identified two main concerns – greenwashing risks caused by incomplete or deficient ESG data and over-reliance on traditional exclusions-based investing, which can cause asset inflation.
To address these concerns the buyside needs new ways to generate and manage better actionable data and insights that help reveal the full sustainability story about potential investments and needs to find a new, broader concept of ‘value’.
Piebe Teeboom, Secretary-General of FIA EPTA, said in a statement: “Like a mountaineer who stands in base camp and sees multiple routes to the summit, let’s recognise that ESG investments and strategies can look different, and may take different paths, yet aim to reach the same goals.
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