Advancing environmental, social, and governance investing

A holistic approach for investment management firms

With the growing focus on social responsibility globally, many investment management companies are including environmental, social, and governance aspects in their decision-making, aided by emerging technologies such as AI and advanced analytics. Not only might this help build credibility with investors, it could also create opportunities for alpha.

The sustainability movement is growing

SOCIAL consciousness has spread throughout many facets of life, and many companies are making a concerted effort to align with these principles. This effort has likely contributed to the steady rise in the media coverage afforded to “sustainable” brands over the past two years. Evidence suggests a similar growth in a desire for what are characterised as “sustainable” or “socially responsible” investments. Globally, the percentage of both retail and institutional investors that apply environmental, social, and governance (ESG) principles to at least a quarter of their portfolios jumped from 48 percent in 2017 to 75 percent in 2019. Whilst directing investments based on one’s values has been around for decades, discussions between advisors and their clients about ESG investing have become commonplace.

Capitalising on a socially responsible future

The recent uptick in investor demand for ESG suggests investment management firms should take action today to maximize the ESG opportunity. The future wave of growth in ESG investing will likely not be driven by screening out “sin” stocks but could instead be fuelled by managers using high-quality ESG data to increase the opportunity for alpha. A burgeoning ecosystem of customised ESG products and platforms presents investment managers with opportunities to further their value proposition to clients.

Investment management firms can take action today to enhance their likelihood of launching a successful ESG program:

  • Understand the intermediary and end-investor expectations for ESG mandates
  • Develop a product portfolio that meets client expectations
  • Communicate and educate investors about the social benefits of the ESG program
  • Adapt ESG principles throughout their firms to gain credibility as an ESG product provider

Investors are still going to consider performance when selecting an investment manager. However, investment management firms may find that ESG metrics improve the opportunity to find alpha as well as attract new clients. Having sustainable products on the shelf might be a necessary first step, but long-term success will likely reside in the ability to demonstrate to investors that the firm has holistically adopted sustainable practices. The ever-expanding expectations of investors and regulators will likely require a proactive approach. Investment management firms should identify any gaps by re-examining their processes through an ESG-principled lens, with an eye on what matters most to today’s investors. By 2025, half of all professionally managed assets could fall under an ESG mandate. For an investment manager to capture a greater share of growth in assets under management, credibility with investors will likely be critical.

Advancing environmental, social, and governance investing
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