Institutional investors are now recognizing the huge potential associated with environmental, social, and governance (ESG) factors in determining the financial performance of companies they target for investment. Consumers are following the same trend, making the demand for responsible investments to increase rapidly. With regulations and policies getting drawn rapidly to maintain pace, it can be pretty challenging for ESG asset management firms. So, how do you get it right as an assets manager?
This post takes a closer look at the ESG asset management to determine what it is. We will also dig deeper to demonstrate how ESG outlook is affecting customer preferences and why you should work with experts to get matters on sustainability correct.
A Closer Look at ESG Asset Management and the Main Challenges
Environmental, social, and governance (ESG) are major factors that help in measuring the sustainability, social, and ethics of a business or company. ESG asset management is the method of governance over a defined amount of wealth to ensure that the approach used to grow it does not harm the planet.
The asset managers, who in most cases are financial institutions, have to make decisions based on the clients’ preferred strategies or objectives.
At a time when more people are getting exposed to ESG matters and regulations emerging, more wealth or ESG funds are flowing into asset management portfolios, resulting in monumental pressure for managers to integrate ESG considerations into their approaches. This is opening a number of challenges for managers, including:
- The areas that asset management firms should focus on.
- Varying local and global ESG expectations from both individual and institutional investors.
- Emerging legal frameworks targeting different areas of ESG, corporate or personal investing..
- Poorly harmonized ESG terms and reporting frameworks. Do you work with TCFD or SASB, among other frameworks when collecting data for risk assessment, and report generation?
- Unclear consensus on the impacts of ESG strategies on financial returns. Since ESG and sustainability reporting solutions are emerging, is the data on financial management applicable for all companies in different industries? Should managers go with local strategies outlined in new frameworks or internationally recommended models for better results?
How ESG Considerations are Impacting Customer Preferences
Investing is no longer only about the returns. Almost every corporate and personal investor now wants to use an investment portfolio to help make the world a better place for all.
The scientific demonstration that human activities are the primary causes of major issues such as global warming has made people start thinking of how they can make the companies they invest in improve the planet we live in. Therefore, clients and investors might insist that the ESG asset management firm avoids stocks or ETF funds of firms associated with harmful practices like whaling, water pollution, or damage to the forests.
ESG asset management companies are flooded by the growing demand for socially responsible investing. Let’s take the example of the United States. In 2020, a survey done by the United States Forum for Sustainable and Responsible Investment established that socially responsible investing attracted more than 1/3 of assets under professional management.
This was approximately USD17 trillion in assets under management.
Clients do not stop there. Apart from factoring in the social aspect of ESG, they also want their funds under professional managers or firms to take ethics into consideration. The goal is to ensure that they do not feel that there is something they could have done to make the planet a better place but failed to on time. For example, some investors might prefer staying away from mutual funds that own stocks of firearm manufacturers. This gives them the satisfaction that their actions or investments might be linked to arms or indirectly linked to services/ products used in harming others.
Policymakers Setting the Pace in Asset Management with New Laws
When running an ESG asset management organization, you have to take note of the emerging legal and policy frameworks. Unlike about a decade ago, every country, stock market, institution and regulatory authority now appears to be aligning towards ESG matters. The message that we have one last chance to redeem our planet has excited leaders, making them craft laws for eco-friendly practices or operations.
Asset managers have to craft their strategies factoring in the emerging laws and target opportunities with greater potential. Here are some of the regulations that are setting the pace for sustainable investing.
- The Sustainable Finance Disclosure Regulation (SFDR) in the EU: This policy created a disclosure and transparency regime concerning the integration of sustainability risks by asset managers in their investment process. It applies at the fund and institutional level.
- Taxonomy in the EU: This is a green classification system that helps asset managers to recognize activities that are green and those that are not. It also imposes product level disclosures for asset managers, requiring them to explain to investors of what levels specific activities are associated with sustainable activities.
- Entity-Level Disclosures in the UK: Asset management firms are required to publish entity-level TCFD reports, demonstrating how they factor in climate-related risks and opportunities.
- Product- or Portfolio-level Disclosures in the UK: Firms offering asset management are required to annually produce a baseline set of consistent and comparable disclosures in respect of their portfolios and products. This gives clients the opportunity to know whether sustainability is being given when managing their funds. Are the targeted ESG goals being achieved?
- The Hong Kong Securities and Futures Commission (SFC) has set up a steering group to coordinate the management of environmental and climate factors in the financial sector. The primary goal is to ensure there is a consistent and comparable climate-related disclosure for all asset managers in the jurisdiction.
Why You Should Work with ESG Sustainability Management Software
The laws we have looked at above set the pace for sustainability focus but also put pressure on ESG asset management professionals. Particularly, they require them to provide accurate and timely information to clients on the moves they make with their funds. Therefore, your decisions as an asset management institution should be prudent to ensure that only sustainable and high-potential investment opportunities are exploited. To do this, you need the right software, and Diginex.com has the best options.
At Diginex.com, we develop high-quality software for helping clients with their ESG sustainability matters. One example of these apps is diginexESG, which allows you to gather data, analyze specific opportunities, and select the most sustainable ones. Other top-of-the-range apps that you should consider are diginexLUMEN and diginexCLIMATE.
To make your focus on ESG even more effective, you might want to get the assistance of an expert. Diginex.com works with experts in ESG matters, and you can count on us to build more knowledge and skills in sustainability management, including data gathering, analysis, and report generation for stakeholders. With experts on your end, you are sure of making the best decisions on ESG matters!
Contact us today for all the assistance that you need.