As the appetite for environmental, social and governance (ESG) investment strategies continues to gain momentum across the globe, concerns are mounting that a lack of definitions and measurements, will hamper asset managers’ efforts to keep pace with the demand, according to a new report – Measurable Impact: Asset Managers on the Challenges and Opportunities of ESG Investment – from the Index Industry Association.
The survey, which canvassed 300 US and European asset managers, found that ESG is increasingly becoming a key priority with 85% putting it at the top of their list. In addition, they plan to increase the proportion of ESG assets in their portfolios from an expected 26.7% in twelve months’ time to 43.6% in five years’ time.
To date, the lion’s share of ESG funds or 80% still goes to European portfolios, with the US lagging some way behind with a share of just under 12%.
The US respondents pointed to regulatory or legal uncertainty, lack of end-investor interest, access to right-sized ESG products and perceived higher costs, as the main reasons.
For those fund managers who are and plan to raise their ESG allocations, their primary motivations is the need for a stronger alignment between financial and societal goals.
As for other main factors, over half or 54% cited client demand while 42% put down portfolio diversification. Forty percent put investment policy as their number one reason followed by reputation and regulatory risk for 36%.
Problems with data, which are not new, were common complaints with 63% highlighting the lack of quantitative data as a major or moderate challenge to ESG implementation.
About the same proportion (64%) pointed to the poor transparency or insufficient corporate disclosure with respect to firms’ ESG activities.
The report found that analyst reports were the main port of call for 63% of companies when sourcing qualitative data, followed by 49% who used direct engagement with companies. Meanwhile 45% reled on company shareholder reports and 41% used both external vendors or regulatory filings.
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ost a third looked at media coverage to some extent while just under a quarter of companies that reported depended on non-governmental organisations as a source of data to track ESG strategies.
The absence of meaningful metrices on ESG performance was also seen as a major and moderate barrier for integration by three fifths or 61% of participants. Nearly the same number (58%) named the lack of data standardisation as a difficulty.
“Although the survey showed a huge uptake in ESG investing which is likely to increase in five years’ time, the lack of corporate data reporting, quality of data as well as standardisation, are major issues,” says Rick Redding, CEO of IIA. “They diverge greatly across geographies. For example, with the S piece in ESG, if you take gender diversity, it is defined differently in the US and Western Europe than in Asia. This leaves ESG investors wanting more clarity about the available investment products.”
Redding also notes that there is a complex array of ESG reporting organisations as well as ESG benchmarks. These range from the UN Principles for Responsible Investment (UNPRI) to the Global Reporting Initiative (GRI), and the Sustainability Accounting Standards Board (SASB), and Task Force on Climate-related Financial Disclosures (TCFD) to name but a few.
Estimates also show that there are over one hundred different organisations producing ESG ratings. The result is that companies vary widely in terms of how they choose to report their ESG activities and metrics.
Fund managers not only feel a disconnect on the data front but also with regulation which they see as hurting innovation in the sector. There has been a recent wave of new rules especially in the European Union with the Non-Financial Reporting Regulation, the Sustainable Finance Disclosure Regulation, and the EU Taxonomy.
This landscape led 56% of respondents to express difficulty in keeping up with ESG regulations, while 65% believe regulators do not pay enough attention to the views of the asset management industry on ESG issues.
The study also confirmed that to date, ESG investing is mainly in the equities sphere. Stocks accounted for 90% of flows into ESG funds in the US and 68% in Europe. However, nine tenths of survey respondents (88%) underscored a need to embrace ESG across other asset classes, including fixed income.
Moreover, the findings verified the importance of indexes to ESG investing. Around 40% of respondents used indexes almost equally for measurement/benchmarking and as the basis for investment portfolios. They are especially prevalent among funds where ESG is a core part of all activities.
Trust was also a big factor with 84% of asset managers said they rely on index providers “a lot or somewhat” to push financial services ESG innovation and standards, just slightly behind the asset-management industry itself which garnered an 88% rating.
“ESG investing is at the early stages,” says Redding. “There needs to be more agreement and coalescence around standards and regulations. However, better corporate data leads to better benchmarks, which allows asset managers to offer better investment products. At the moment, there are thousands of benchmarks, but over time I think we will see greater innovation and mass customisation around a handful of benchmarks replicating what asset managers want for their ESG products.”
©Markets Media Europe 2021
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