“AUM Exceeding $103.4tn”: Sustainable Investing, The Great Beyond for Asset Managers

Published On June 22, 2021
In ESG, Blog Archives

The word “sustainability” is becoming an increasingly common term in business environments. With growing consumer consciousness, it is not uncommon to see organizations reorienting their internal and external activities to fit more ethical practices. Today’s best performing corporation is not just succeeding on the basis of economics but also because of the traction around the brand. Better overall practices allow all stakeholders to reorient and focus on the bigger picture.  

Within the investment industry, the ESG criteria guide investors towards sustainable opportunities. ESG or Environmental, Social and Governance performance covers; 

  • Environmentally sustainable practices including cutting down the use of non-renewable resources and overall waste. 
  • Socially sustainable practices that cover stakeholders both internally like employees and externally like surrounding business owners. This involves creating hospitable work environments and contributions to the surrounding community. 
  • Effective practices around governance ensure clear regulations and guidelines both within the organization and with legal compliance maintenance. 

The benefits of ESG considerate organizations are clear; better long term running practices make for better long term investments. However it is critical to introduce forward thinking professionals for the right assessment; enter today’s Asset Manager.  

There are a number of obstacles asset managers looking at sustainable investment face. These include clarity around criteria to measure, where to find accurate data, expanding sustainable investment beyond equities, the concept of greenwashing and even development around talent and their capabilities to facilitate long term sustainable practices. Asset managers with a creative approach to the subject matter are more likely to overcome these hurdles and establish themselves as leaders around a nascent market.  

With the growing awareness around ESG criteria and sustainability investment, ethical compliance is slowly seeping into corporate regulation. This includes; 

The EU Sustainable Finance Action Plan 

Published in March of 2018, the objective of the plan is to meet three key objectives; 

  • Reorientation of capital flows in the direction of sustainable investment opportunities 
  • Move sustainability into integral criteria for risk management  
  • Encourage transparency and long term measures to encourage financial stability and economic activity 

This also paved the way for the EU’s currently renewed strategy on sustainable financing launched by the European Commission in 2020. The sustainable financing strategy is aimed at encouraging private investment for sustainable projects and activities while supporting the European Green Deal. The Green Deal has been pushing legislation and guidance around meeting the EU’s goal of going carbon neutral by 2050.

The Principles for Responsible investment

Supported by the United Nations, the principles for responsible investment are a set of both voluntary and aspirational principles to guide ESG incorporation. Since its establishment in 2006, the number of signatories has seen significant growth. As of December of 2020, 3611 signatories were offered with assets under management exceeding USD $103.4 trillion.  

With 52 signatories from Mainland China and 56 from Hong Kong based institutions, ESG guidance principles penetrated one of the largest global markets. If one of the world’s biggest economies is on board with sustainable development, why would the world not follow suit?

Principles of resonsible investment

The EU Sustainable Finance Disclosure Regulation (SFDR) 

Enforced as of December 2019, the EU introduced new categories of benchmarks. These categories are the EU Climate Transition Benchmark and the EU Paris-aligned benchmarks. Benchmark administrators and asset managers are able to use these indicators to introduce ESG compliance and allow for the best methodologies and uniform standards. 

Benchmark compliance is a green light for higher value investors to safely allocate funds without worrying about future sustainability.  

The Task Force For Climate Related Financial Disclosures (TCFD)  

The TCFD offers recommendations for listed companies around transparency guidelines and information disclosure. This includes governance, strategies, risk assessment, metrics and objectives. The objective is to apply TCFD clauses to asset management and by December of 2020 a final list of rules including a “comply or explain” annotation was included.  

The November 2020 Climate Change Position Paper published by the Investment Association (IA) requested for the UK government to broaden stances on the same and mandate all large companies to report in line with TCFD and make changes to internal regulations around the same.  It is expected by 2025 the UK will become the first country to align itself with strong mandatory disclosure policies.

ESG integration

Other Opportunities and Challenges for Asset Managers

With growing concern around transparency and accountability, investors require more information before making a financial decision. While governments are mandating policies on both national and international frontiers, the choice between ESG compliant organizations and non-ESG compliant businesses becomes transparent. Investments that include ESG considerations and factors outperform those that do not. Additionally ESG compliance reduces overall risks allowing for investors to delegate finances without strong worry.  

A common strategy exercised is referred to as the “so-called negative screens”. This method of investing side steps organizations and industries that inherently create a negative impact on society including tobacco and fracking. Positive screens can be used to reveal organizations that are front runners in terms of ESG compliance. Factors considered include effects on climate and attention towards diversity. 

Asset managers are also constantly enhancing engagement capabilities by encouraging effective and open dialogue with organizations. A lot of concerns around ESG compliance can come from information gaps. Allowing businesses to safely ask questions and slowly implement better practices allows for true influence and long term change around sustainability practices.  

According to a 2018 Morgan Stanley survey, over 84% of current asset owners are looking at or have been actively pursuing ESG integration into their investment process. Over the last four years,  60% of signatories have already begun the process.

ESG investment

Concerns around data standardization, defining credible ESG integration approaches and introducing the right expertise and capabilities into an organization can easily be dealt with when ESG consulting or ESG advisory services are introduced.  

The strong traction around ESG standards is slowly creating a uniform foundation countries across the world can use to benchmark their ESG rating. While these mechanisms are being built, it is up to local governments and corporate unions to encourage attention around ESG and for Asset Managers to decide the criteria important to consider for investment. 

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