As global demand for Environmental, Social, and Governance (ESG) investment strategies continues to increase, asset managers question their ability to keep up with demand, according to a new survey.
The Index Industry Association (IIA) gathered input from U.S. and European asset managers Measurable Impact: Asset Managers on the Challenges and Opportunities of ESG Investment study. They found that many are grappling with the issue of how to better define and measure sustainable investments. The growing importance of ESG investing is also confirmed by the survey results, with 85% of asset managers saying ESG is a high priority for their companies.
The U.S. respondents cited investment policy and client demand as the top factors for adopting ESG products and services. And all those surveyed expect ESG to become even more important in the future, with the proportion of ESG assets in their portfolios expected to rise from an estimated 26.7% in 12 months’ time to 43.6% in five years’ time.
Key challenges for ESG
Meeting the demand for ESG is not without challenges according to the survey. Key findings include:
- 63% of investment companies highlight a lack of quantitative data as a major (24%) or moderate (39%) challenge to ESG implementation
- 64% cite a lack of transparency or insufficient corporate disclosure in relation to firms’ ESG activities
- 61% of respondents pointed to a lack of agreed ratings and methods among providers as a major or moderate challenge to ESG implementation for fund and asset managers
- More than half (58%) cite a lack of data standardization.
There is not an agreed-upon ESG reporting organization and by one estimate there are over 100 different organizations producing ESG ratings. The result? Companies vary widely with how they report their ESG activities and metrics.
Asset class options and indexes
Globally, ESG investing is still heavily dominated by equities and accounted for about 90% of sustainable funds in the U.S. in 2020. However, 88% 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 and the report confirms their importance. Indexes were almost equally cited for measurement/benchmarking (40%) and as the basis for investment portfolios (39%). The use of indexes for investment is especially prevalent among funds where ESG is a core part of all activities (56%). And index providers are highly trusted: 84% 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%).
“Better corporate data leads to better benchmarks, which allows asset managers to offer better investment products,” said 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 standardization and the complex array of ESG reporting organizations leaves ESG investors wanting more clarity about the available investment products.”