While the pace of flows into ESG funds and strategies has slowed since the height of the pandemic, the momentum behind sustainability within and across portfolios is irreversible.
Yet as interest deepens and the opportunity-set widens, investors face new challenges, such as how to effectively screen, select and then monitor ESG allocations? There is also a pressing need for higher quality and more consistent data, to drive investment decisions and ensure ESG can deliver on the values and beliefs of individual institutions.
On the other hand, new offerings from asset managers are under the spotlight as global and regional regulatory expectations and market standards come into sharper focus.
At the same time, asset managers in Asia Pacific are looking further afield to grow their asset base, requiring a better understanding of the diversification that global investors want and need for their portfolios going forward.
For insights into how the ESG journey, investor demand and decision-making are evolving, AsianInvestor and Nasdaq hosted an engaging and timely discussion at a recent webinar, involving:
- Jonathan Taylor, CFA, investment consultant, international wealth, APAC, Aon
- Sharmila Kassam, head of asset owner solutions, Nasdaq
Read key takeaways below and watch the on-demand version
Creating the foundations for effective ESG investing
- As a polarising topic in the US, progress has been varied, and continues to lag developments in Europe.
- In Asia, meanwhile, investors and other stakeholders are making headway with ESG and have the benefit of observing how their peers elsewhere globally are meeting various requirements.
- An important aspect of ESG for a board is being proactive, rather than having policies imposed from outside.
- There is always a need for more education about the ESG approach. A lot of the available data must also be considered and understood as part of the process.
“As compelling as the empirical and hypothetical case is for ESG integration, the market volatility has reminded investors, if they needed reminding, that the actual funds they invest in incorporate a consideration of ESG factors in different ways. And that variety in implementation, of course, means “ESG funds” will not always deliver neutral or outperformance in all circumstances.”
“Many investors look to ESG and sustainable investing as an alpha play over three and five years, or even longer.”
“An effective responsible investing framework starts with identifying what you want. Through our surveys and workshops with clients, invariably those ambitions and beliefs of stakeholders are shown to be markedly different from the current position. That sets the tone for the conviction to want to do more.”
“Although we see several funds claiming to be ‘ESG’ that might not be, it is still broadly encouraging to see a growing number of managers now wanting to apply ESG factors. As ESG has become a more prevalent topic, there is an appetite among investors to understand how E and S strategies, especially, relate to their values and investment philosophy.”
“The UK has been a leader in providing regulation and guidance to asset owners such as pension funds. Recent examples include a government consultation on how pension plans can/should integrate social factors; TCFD aligned disclosures; the plausibility of allowing split voting to increase asset owner influence.”
Bridging the ESG data gap
- More standardised data would make it easier for asset managers to integrate ESG in decision making and respond to requests from asset owners.
- Better quality data should also improve awareness to engage with companies as well as stimulate more ESG-focused engagement
- Until there is more standardisation and data, the key to monitoring is consistent reporting.
“Standardisation is further away than many people would like it to be, regardless of the regulatory initiatives globally. This is especially the case in the US given the different approaches to ESG policy at a state level. For investors, they need to treat divergence in policy as just another of the risk parameters within which they need to work.”
“Common feedback from third party ESG data users is, there is a lot of missing information in terms of carbon reporting in EM. However, it is improving, and worth noting that the starting points in the net zero journey are different; many countries may not have had the same tone from governments.”
“The development of technology has been a catalyst for extracting more ESG-related data. At Nasdaq, we are focused on gathering more analytics and metrics to understand ESG. The advancement of technology will help us to achieve these goals more quickly.”
Scrutinising external managers on sustainable strategies
- Choosing external managers for ESG funds is a way for investors to ask more searching questions that hold external managers to account for what they promote. This includes their fundamental beliefs about these issues and how they incorporate them into their investment approach.
- Investors are also looking for more information from third-party managers on the process of how people are hired, the diversity of the workforce and other internal issues.
“Investors tend to look at regional managers that are close to the market in which their strategy is focused, especially with ESG.”
“As we see more interest from members of defined contribution pension plans and more desire of the organisation to engage their employees, more specific priorities can be determined. This connection, and accountability to employees (who are becoming increasingly interested), can lead to more unique data and transparency requirements asked of managers.”
“As standardisation increases and the quality and completeness of data improves, it will be interesting to see the extent to which asset managers live up to their ESG promise.”
“Reviewing marketing and public information alone is not enough to identify greenwashing. While ESG integration connects to many areas, simply put, the ask has always been the same – to see that the various ESG integration processes in place are connected to improving actual outcomes and enhancing the long-term value to investors and society.”
“Nobody has an answer to all the challenges and issues, but more investors want to understand how different market players – including Nasdaq – deliver this through the corporate culture and integration of processes.”
Emerging ESG investment opportunities
- An array of asset owners, including family offices, pension funds, insurers and other investors, are displaying expressions of sustainability and impact across asset classes.
- Appetite among asset owners is growing for net zero-aligned investment solutions.
“I see continued growth in passive ESG indices over time, as well as in active climate solutions. Innovative themes with the potential a bit further down the track include hydrogen, ocean capital and microfinance. I would enjoy seeing more backing from the investment community to bring them more into the mainstream.”
“Biodiversity represents an exciting opportunity in a changing world. In addition, infrastructure in many regions around inherently has ESG implications. Also, from a data perspective, the technologies that enable more granular and higher quality data offer investment potential.”
- Read the Nasdaq ESG Analytics White Paper, “Pioneering Transparency into the ESG Space Through the Power of Data and Technology”
- Learn more about Nasdaq’s eVestment
- Learn more about Aon’s APAC Wealth Solutions Insights, Aon Insights - APAC Wealth Solutions
Read Aon’s Responsible Investment publications, Responsible Investing (aon.com)