Investment manager

The ESG dynamic puts the reporting of managers in the spotlight

Did you know that, according to a new study by asset management consultant Casey Quirk, assets dedicated to sustainable investing are expected to reach $ 13 billion worldwide by 2025, more than four times the total of 2, 8 billion dollars at the end of 2020?

Elsewhere, the Global Sustainable Investment Alliance (GSIA) says sustainable investment in major financial markets has grown 15% over the past two years and now exceeds $ 35 billion.

Meanwhile, the Net Zero Asset Managers initiative indicates that nearly half of the total funds managed globally ($ 43 billion) are now committed to a goal of net zero emissions.
The numbers tell a double story. First, impressive growth. Investor demand, new regulatory disclosure requirements, and the launch and reclassification of environmental, social and governance (ESG) funds have fueled an increase in ESG-focused asset allocations, a trend that shows no signs of slowing down.

Second, there is the multitude of definitions and designations related to GSS that have sprouted up over time, and the wildly variable statistics on the size and growth of the industry that result.

Given the current lack of standardization of ESG reporting in the industry, it’s no wonder that so many investment firms struggle to report the true value of their ESG-focused investments. For their part, investors must navigate a mix of metrics, rating systems and dashboards to determine the ESG value of a particular fund or investment.

To demonstrate best practices and stay ahead of regulator and investor requirements, investment managers need to go beyond ESG reporting as a tick exercise, and rather ensure that it is aligned with their basic investment strategy and business goals.

To achieve more effective ESG reporting, fund managers will need to follow these five key steps:

Understand the main drivers
Understanding and responding to current market drivers will enable companies to create an ESG reporting strategy that meets the needs of existing and future customers. The Covid-19 crisis has been a particular inflection point, with investors increasingly taking ESG factors into account in trying to address the issues exposed by the pandemic. As a result, the social component of ESG can be expected to come to the fore.

Climate concerns also remain a priority for many. The release earlier this year of Netflix’s docufilm Seaspiracy, a series of new net zero commitments for countries and businesses, as well as COP26 in November – when world leaders meet in Glasgow to capitalize on the historic Paris meeting. of 2015 – suggest that 2021 could be a turning point in the fight against climate change.

Generation Z will also be an increasingly important presence in business and as a wealth accumulator. They will bring with them a different and more ESG-focused set of values ​​as active professionals and future investors.

To be realistic
When identifying metrics to report on, companies need to start small and set realistic and achievable goals. Over time, as abilities and experience improve, they may broaden their goals.

Funds often have multiple stakeholders, each with different preferences. The trick is to identify the metrics that are truly reportable and that make sense to all parties involved. Avoid trying to do too much too soon. Reporting on the impact of every area of ​​a fund won’t work, so choose a few ESG metrics that you can report on effectively, for example using data from the underlying investment companies.

With new technologies, approaches and players constantly entering the market, ESG-conscious investors will ultimately be influenced by the story behind the numbers and how that story is told.

Demonstrating the impact of ESG investments, and doing so in an engaging manner, will be the key to attracting this growing cohort of investors.
Finding the right balance between qualitative information and quantitative measurements is essential. From mission statements to video content, it’s incumbent on the end investor to feel more connected to the impact of their investments on the ground.

Don’t overlook the “G” of ESG
The “E” and “S” have garnered the lion’s share of attention in recent years, eclipsing the importance of the “G” element. Yet without the proper processes, legislation and reporting in place to support environmental and social progress, businesses will struggle to keep pace with demand.

In a post-pandemic environment, effective governance will allow us to rebuild our economies and societies on a more solid foundation. And it will help the investment industry to become more robust and sustainable.

Align ESG reporting
Generating real impact as a stakeholder in the business doesn’t happen overnight. In some cases, it can take up to five or ten years. This is why linking ESG reports to the overall investment strategy of companies will be essential for long-term success.

Authenticity is crucial here. Investment firms should base their ESG reporting strategy on what they are trying to achieve as a business, not what their competitors are doing. More than that, it has to be genuine – something the company does because it wants it, not because of a legal obligation.

ESG investing is the way of the future. Correct ESG reporting will be essential to help companies compete in this changing environment.

Jacolène Otto is Head of Private Equity and Real Estate at Malta-based fund services firm Maitland.

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