It’s not easy being green: Managing authentic transformation within sustainable investing

The role of sustainability for your organization

Dedicated sustainable investing will more than quadruple in size, totaling $13 trillion in assets under management worldwide, by 2025. Dedicated sustainable investing represents an evolution, as these portfolios actively promote environmental, social, and/or governance characteristics as a primary investment objective, rather than only considering such factors as one of many investment inputs.

CEOs must develop a vision around dedicated sustainable investing, one that attracts buyers and guides executive decisions. Leaders of asset managers must find a balance of flexibility and conviction that works best for their stakeholders: customers, talent, and owners. These visions fall into four roughly defined archetypes, each of which reflects an increasing degree of alignment around sustainability values and a commensurate level of strategic priority for the enterprise:

1. ESG risk integrators: Asset managers with limited or no commitments to dedicated sustainable investing or products, instead focusing on using ESG data to inform one of several risk factors assessed in building portfolios.
2. Client-led ESG providers: Asset managers who maintain positions on sustainability but present them as flexible options available for clients to direct, depending on their own range of values.
3. Goals-oriented ESG outcome providers: Asset managers who clearly articulate commitments on sustainability issues, using them as core firm principles around which to make not only active investment choices, but also decisions around firm strategy.
4. Sustainability “purists”: Asset managers, primarily boutiques, who orient sustainability at the heart of all processes as their main competitive advantage, with strict and visible adherence to sustainability principles across the investment offering.
   

Defining dedicated sustainable investing

Key attributes of sustainable investing leaders

Sustainable investing leaders will effectively link strategy and their sustainability vision by aligning five key attributes:

Adapting the investment process

Professional buyers do not want portfolio managers that only talk about ESG. They are focusing on how (and how consistently) an investment organization sources and uses ESG data and how it translates into investment decision-making, including screening, selection, portfolio weighting, and exit strategy. Large investors with substantial sustainability commitments rank ESG articulation highest among all criteria with which they score potential providers.

Dedicated sustainable investing archetypes: Priorities and challenges

Instigating change

All asset managers will require thoughtful answers to questions about their approach to sustainability, as well as the capabilities and operating models needed to support their chosen path. Defining a vision helps asset managers define key trade-offs and structure their change management priorities and plans.

This prioritization helps define the key trade-offs each archetype contains:

1. ESG integrators require less change, but are vulnerable if buyer sustainability expectations continue to rise.
2. Client-led ESG solutions players can serve clients across a wide range of sustainability beliefs, at the cost of high complexity and potentially subscale offers.
3. Goals-oriented outcome providers align well with medium-term sustainable investment demands, but they will also face hard conversations with talent and leadership about career objectives and remuneration.
4. Sustainability purists represent the bleeding edge of sustainable investing, but only appeal to a narrower buyer group, slowing efforts to achieve scale.