2022 - The growth opportunity of the century

Beyond the above mentioned necessary strategic changes, managers must also strive to be consistent in their chosen ESG approach in order to establish and maintain credibility. This calls for a demonstrable commitment to walking the talk by exemplifying the same level of sustainability and ESG consciousness in corporate strategy and philosophy that asset managers expect from their portfolio companies. They must also talk the walk by upping transparency and thoroughness in internal ESG reporting, as well as by embarking on firmwide circulation of ESG knowledge in order to harmonise their sustainability story.

Once managers have positioned themselves with regards to ESG, they must make a number of strategic product considerations. Firstly, they must decide which new ‘Sustainable Finance Disclosure Regulation’ category they would like to launch their products under (i.e. Art. 9, Art. 8 or non-sustainable). They must then decide how to implement ESG indicators in their investment and risk processes, how they will structure and rationalise their fee structures; and how they will elucidate and market their ESG efforts to the investor base.

The ESG data constraints that asset managers face border mainly on inaccuracy and non-alignment. This impacts ESG benchmarking, impact evaluation, risk management and the identification of sustainable investment opportunities. We identify two main options available to Asset and Wealth managers when it comes to overcoming this hurdle. Firstly, they can engage more closely with underlying corporates in order to receive accurate and timely date sets and reporting. Secondly, they can manage various data sources in order to foster an internal data environment sufficiently granular and exhaustive to serve their needs by implementing solid, regulatory-backed ESG reporting strategies and leveraging on third-party data providers. However, considering an immature data market, the management and intellectual assessment of ESG data will be one of the key success factors for Asset and Wealth managers leading the ESG competition over the coming three to five years.

As investors and policymakers alike attribute increasing importance to the assessment and mitigation of ESG risks, asset managers will need to vitally restructure their risk management frameworks in order to comply and thrive. Overlooking ESG-related risks could have serious reputational and financial repercussions for asset managers in the new landscape. Developing a more resilient structure for risk management involves adopting and implementing expert risk identification and management practices internally and within underlying corporates. Managers will also have to monitor and evaluate portfolios at a high level and frequently disclose whatever ESG exposures there may be. Furthermore, they will have to reinforce efforts to ensure ESG compliance of investee companies either through greater engagement or through proxy voting.

As regulatory requirements relating to reporting and disclosure mount, and investors attribute increasing attention to the ESG metrics of the asset managers with which they invest, it is imperative that AWMs restructure their reporting processes. Those that go above and beyond minimum reporting requirements stand to be the biggest winners in this new landscape. 

In order to accelerate the consideration for ESG indicators and risks as well as to successfully respond to an increased expectation of investors for ESG matters, asset and wealth managers need define their ESG strategy and corporate indent. Based on this they need to educate both their portfolio companies and their investors on ESG and the interaction with capital flows and financial performance. It will be critical to build stronger ESG expertise among their employees by upskilling existing staff on ESG principles and strategically scout for and integrate more diverse and ESG-trained talent.