Jacolene Otto, Head of Private Equity and Real Estate at Maitland, emphasises the need for fund managers to match ESG-related reporting to investment strategy and business objectives.
Dedicated sustainable investing assets are forecast to reach US$13 trillion globally by 2025, more than quadruple the US$2.8 trillion total at year-end 2020, according to new research from asset management consultant Casey Quirk. The Global Sustainable Investment Alliance (GSIA) says sustainable investment in major financial markets has grown 15% over the past two years and now tops U$35 trillion. The Net Zero Asset Managers initiative indicates almost half of the total funds managed globally (US$43 trillion) are now committed to a net zero emissions target.
The figures tell a dual story. First, they show impressive growth. Investor demand, emerging regulatory disclosure requirements, and the launch and reclassification of ESG funds have fuelled a surge in ESG-focused asset allocations – a trend that shows no sign of slowing down.
Second, they reflect the multitude of ESG-related definitions and designations that have sprouted up over time, and the wildly varying statistics about the industry’s size and growth that result.
Given the industry’s current lack of ESG reporting standardisation, it is no wonder so many investment firms are struggling to report the true value of their ESG-focused investments. For their part, investors must navigate a melange of metrics, rating systems and scorecards to determine the ESG value of a particular fund or investment.
To demonstrate best practice and stay ahead of regulator and investor demands, investment managers must move beyond ESG reporting as a tick-box exercise, and instead ensure it is aligned with their core investment strategy and business objectives.
To achieve more effective ESG reporting, fund managers will need to take five key steps into account:
Understand key drivers
Understanding and responding to current market drivers will enable firms to create an ESG reporting strategy that meets the needs of existing and future clients. The Covid-19 crisis has been a particular inflexion point, with investors increasingly considering ESG factors in an attempt to address the issues exposed by the pandemic. As a result, we can expect to see the social component of ESG move to the forefront.
Climate concerns remain top-of-mind for many too. The release earlier this year of the Netflix ‘SeaSpiracy’ docufilm, a raft of new country and corporate net zero commitments, plus COP26 in November – when world leaders will gather in Glasgow to build on the landmark 2015 Paris meeting – suggest 2021 could be a turning point in the fight to tackle climate change.
Gen-Z will also be a progressively important presence, both in the business world and as wealth accumulators. They will bring with them a different and more ESG focused set of values as working professionals and future investors.
When identifying which metrics to report on, firms should start small and outline realistic, achievable goals. Over time, as capabilities and experience improve, they can expand their objectives.
Funds often have multiple stakeholders, each with different preferences. The trick is to identify metrics that are actually reportable and make sense for 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 pick a couple of ESG metrics you can report on effectively, for example by using data inputs from underlying investment companies.
Think about the story you want to tell, and tell it well
With new technologies, approaches and players entering the market, ESG-conscious investors will ultimately be swayed by the story behind the numbers, and how well that story is told. Demonstrating the impact of ESG investments, and doing it in an engaging way, will be key to winning over this growing investor cohort.
Striking the right balance between qualitative information and quantitative metrics is essential. From mission statements to video content, the onus is on making the end-investor feel more connected to the impact their investments are having on the ground.
Don’t neglect the ‘G’ in 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 correct processes, legislation and reporting in place to underpin environmental and social progress, firms will struggle to grow at the pace of demand.
In a post-pandemic environment, effective governance will enable us to rebuild our economies and societies on stronger foundations. And it will help the investment industry become more robust and sustainable.
Align ESG reporting with your investment strategy
Generating real impact as a company stakeholder doesn’t happen overnight. In some cases, it could take up to five or ten years. This is why tying ESG reporting into firms’ overarching investment strategy will be critical 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 firm does because it wants to, not because of some legal obligation.
ESG-oriented investing is the way of the future. Getting ESG reporting right will be vital in helping firms compete successfully in this changing environment.