As global demand for Environmental, Social and Governance (ESG) investment strategies continues to increase, asset managers are questioning their ability to keep up with demand as they grapple with the issue of how to better define and measure sustainable investments.
That’s one of the key findings of a recent survey of 300 US and European asset managers sponsored by the Index Industry Association (IIA) in the report Measurable Impact: Asset Managers on the Challenges and Opportunities of ESG Investment.
“Better corporate data leads to better benchmarks, which allows asset managers to offer better investment products,” says Rick Redding, CEO of IIA. “The survey highlights that, while there is growing global demand for ESG investment products, a lack of corporate data reporting standardisation and the complex array of ESG reporting organisations leaves ESG investors wanting more clarity about the available investment products.”
The growing importance of ESG investing is confirmed by the survey results, with 85 per cent of asset managers surveyed saying ESG is a high priority for their companies. These managers expect ESG to become even more important to their companies in the future, with the proportion of ESG assets in their portfolios set to rise from an expected 26.7 per cent in twelve months’ time to 43.6 per cent in five years’ time.
The survey, which was sponsored by the IIA, identified a series of challenges to creating better ESG products for investors. Among these challenges is a lack of reliable corporate data about the ESG activities of companies in which asset managers could invest.
The data problem in ESG investing is pervasive. Sixty-three percent of investment companies surveyed highlight a lack of quantitative data as a major (24 per cent) or moderate (39 per cent) challenge to ESG implementation. Getting information on ESG activities can be challenging, with 64 per cent concerned about a lack of transparency or insufficient corporate disclosure in relation to firms’ ESG activities.
More fundamentally, there are widely varying philosophies on how ESG performance should be evaluated. In the survey, 61 per cent of respondents pointed to a lack of meaningful metrics as a major or moderate challenge to ESG implementation for fund and asset managers. A similar proportion (58 per cent) highlighted a lack of data standardisation. Internationally, there are countless ESG reporting organisations and conventions.
Globally, ESG investing is still heavily dominated by one asset class: equities. These attracted about 90 per cent of sustainable funds in the U.S. in 2020.[1] In Europe, about 68 per cent of ESG funds went to equities in the last quarter of 2020, with about 18 per cent going to fixed income. However, 88 per cent of survey respondents highlighted the need for greater acceptance of ESG in more asset classes such as fixed income.
Indexes are widely used by asset managers to reduce the information haze and complexity in financial markets.
The survey confirms the importance of indexes to ESG investing. The asset manager respondents use indexes almost equally for measurement/benchmarking (40 per cent) and as the basis for investment portfolios (39 per cent). The use of indexes for investment is especially prevalent among funds where ESG is a core part of all activities (56 per cent). And index providers are highly trusted: 84 per cent of asset managers said they trust index providers a lot or somewhat to push financial services ESG innovation and standards, just slightly behind the asset-management industry itself (88 per cent).
