There isn’t a one size fits all solution for investment firms building their ESG capabilities, says Rhodri Preece, Senior Head of Research at the CFA Institute.
More than nine out of ten financial services firms had difficulty filling vacancies last year, blaming a serious shortage of talent.
According to recent research from the Financial Services Skills Commission (FSSC): “UK financial services firms are experiencing acute skills shortages. The lack of talent restricts ability to harness the potential of technology and big data. While those companies with the right skills – both technical and behavioural – can press ahead with transformation, others cannot do so for lack of talent.”
FSSC says skills shortages reflect “the megatrends impacting financial services such as the wide-ranging effects of globalisation”, and the pressure to demonstrate ESG credentials; areas where financial services firms are failing to make suitable investment in training up their workforces.
Last month, the CFA Institute published its ‘Future of Work’ survey, which revealed fewer than half of respondents receive support from employers to develop the new skills they need, which are typically lacking in ESG data analysis and Artificial Intelligence (AI).
To understand the skills gap, the CFA Institute looked at the proportion of professionals who say they are proficient in a particular skill, and then asked whether they were seeking training and development in that same area.
Nine percent of professionals responding to the CFA Institute survey say they are proficient in sustainability issues. Seventy percent of the respondents say they are either currently pursuing or plan to pursue training and development, creating a skills gap of 61 percentage points.
Rhodri Preece, Senior Head of Research for CFA Institute, says: “Only a relatively small proportion of investment professionals claim to be proficient in sustainability or ESG issues, creating a big skills gap. It’s the biggest skill gap out of a range of more than ten different skills we analysed, including AI and machine learning skills, crypto assets, leadership skills, data analysis and coding.”
Importantly, the CFA Institute finds that investment professionals lack the skills necessary to analyse the huge amount of data generated to demonstrate investee companies’ alignment with ESG criteria.
CFA Institute members were asked how sources of investment decision making are changing, and more than three-quarters (76%) of respondents say sustainability ratings and alternative data sources are becoming more important.
More than a third (37%) of CFA Institute members surveyed believe their role will be “substantially different in five to ten years’ time”, with 51% believing this is a result of an increased focus on sustainability.
One example provided by the CFA Institute is ESG analysts. A majority of these respondents anticipated substantial change, and about 10% said the role would cease to exist in five to ten years’ time.
The CFA Institute reports that there are many ways that this specialist role could develop different characteristics, becoming more mainstream with ESG expertise diffused among investment professionals more broadly.
Preece says: “We looked at whether they employ ESG specialists, or whether they require analysts and portfolio managers to have basic training in ESG so that they can incorporate that into their daily routine. Do they instead rely on third party providers to get the ESG intelligence and analysis they need to do the job? We found that there was fairly evenly split across the three ways of incorporating ESG.”
He adds: “I don’t think there is any kind of one size fits all solution to how a firm builds its ESG capability and it will likely depend on the organisation’s size and resources and the intensity of their ESG strategies.”
Preece says the CFA Institute is responding to the demand for both ESG generalists and specialists by incorporating two tracks onto its training courses.
Most recently, it introduced the ESG Certificate, which it describes as providing “the knowledge you need to manage investments with a focus on integrating ESG factors. It can help you gain an edge in a fast-moving market. You’ll develop expertise in a field in high demand by top firms worldwide and become part of the solution to the top issues impacting our world”.
Preece says: “There are different ways of building out ESG capability. In the CFA Institute programme, which is a generalist programme, we have ESG readings incorporated across ten different subject areas. If you look at the total number of readings in the programme, roughly 20% addressed ESG topics.”
The Certificate for ESG investing has had more than 20,000 registrations since launch, Preece adds.
Expanding on the demand for both ESG generalists and specialists, Preece points to a third option for investment managers: T-shaped.
The CFA Institute describes this as “a combination of deep knowledge in a single domain and wider knowledge of other fields and the ability to connect them. These include being able to connect across disciplines, being systems savvy, understanding larger organisational contexts, having situational fluency/adaptability, cultivating a valuable network of contacts, and understanding and leveraging diverse perspectives.”
The Future of Work study found that “although technical skills are often the focus, when industry leaders are asked what the most important skills for future success will be, they are more than three times as likely to say T-shaped skills than technical skills”.
Preece says T-shaped skills are typically more applicable to the areas of AI and data science, but argues that there is still relevance to ESG capability.
“Individuals with what we call T-shaped skills can understand the relevant investment context and work and communicate with the technologists who develop the solution, such as product managers and innovators who can help bridge the knowledge gap between the two key sides and glue the component parts together.”
He continues: “That’s a particularly effective solution in the case of data science and AI, but with ESG it’s a little different. However, as noted, we see firms using a variety of different approaches. Some have specialists that are focused on sustainability analysis, and they will need to communicate their findings and analyses into the portfolio managers when they’re building an investment thesis.”
War for talent
Building ESG capability is, according to a 2022 study from consultancy firm Deloitte, a business imperative if asset managers are to attract investors both immediately and in the future.
“Improvements throughout an organisation may strengthen the firm’s commitment to sustainability in the eyes of investors and create an avenue for differentiation in the ESG investing landscape. Many investors are seeking greater detail about firms’ holistic incorporation of ESG practices,” Deloitte reports.
As the war for control of the sustainable investment market intensifies, asset managers need to reinforce their armies. The current supply of talent is not enough to meet demand and firms will need to expend their own resources in creating deeper pools. Without this investment in people, the industry’s ability to live up to its ESG promises looks doubtful.