Growing concern about the urgent threats facing societies, economies and the planet – and an increasing focus on the role companies should play in tackling them – has brought the asset management industry to a crossroads. The environmental, social and governance (ESG) investment trend is accelerating and simultaneously becoming more complex. Appetite to invest in these strategies is growing, the approach investors are taking to ESG is becoming more sophisticated as their understanding deepens, and regulators are sharpening their scrutiny of the data and disclosures that underlie ESG strategies.
Asset managers across Europe therefore are facing a major challenge: how to navigate a path through these issues and build a sustainable business model for a new era of ESG-focused investment. Achieving this will mean taking long-term, strategic decisions in the immediate future about their approach to ESG and their market positioning. Since the start of the Covíd-19 pandemic, flows across the globe have accelerated further as investors paid increasing attention to the long-term sustainability of their portfolios.
For asset managers, this steepening of the pre-Covid trend line is being driven by two key forces, as follows.
Investors are increasingly focused on the role that companies can and should play in tackling urgent threats to the environment and society, especially the issue of climate change. They are therefore seeking ways to ensure companies make a measurable contribution to addressing these threats.
Besides other national and Europe-wide regulatory moves, the European Commission’s sustainable finance work stream is bringing forward a series of regulatory initiatives feeding into the targets set by the European Green Deal. These initiatives are intended to make ESG themes more investable for institutional and retail investors, thereby unlocking huge additional investment flows into this area.
The European Green Deal aims to make Europe the first climate-neutral continent by 2050. A central element of the Green Deal is the European Green Deal Investment Plan, which is intended to unlock at least €1 trillion of sustainable investments in the decade to 2030 to support the transition to climate neutrality. The accompanying sustainable finance strategy will be implemented via a series of guidelines and regulations around ESG, most of which are due to come into force in 2021 and 2022. These rules have major implications for all participants in the financial system, especially in areas concerning the collection and reporting of data relating to ESG issues.
In deciding their strategic response to the growing importance of ESG for both their institutional and retail client base, asset managers must make a crucial choice. Should they regard this shift in the landscape as primarily an issue of compliance, requiring them simply to adapt to a new layer of regulation, or should they view it as an opportunity to align the purpose and ambitions of their organization with a major long-term industry trend and establish ESG as part of their DNA and value proposition?
Both approaches are feasible, but whichever is chosen, asset managers will need to address a series of key questions across three areas , and the approach they choose will depend in part on where they play in the market.
What is our ESG ambition, what commitments will we make, what measures do we use and what does this imply for our market positioning?
How effectively can we align our product offering with our chosen ESG strategy? In which product categories are we best positioned and how well do these address the opportunities available in ESG? How are we going to segment and target clients with our new offering?
How do we model ESG risks and set our ESG risk appetite? How do we attract the diverse talent we require? What do we need to adjust in our business model, organizational structures and governance framework to execute our chosen strategy? What ESG data, IT infrastructure and reporting do we need?