The concept of investing in environmental, social, and governance (ESG)-centric products is not new. Institutional investors have long modelled their investment strategies around socially responsible themes such as clean air and water, diversity, human rights, and workplace fair practices.
However, sustainable investing in its current form has recently experienced considerable market momentum, driving large inflows into ESG-focused products, resulting in an average compounded annual growth rate (CAGR) of 27 percent in global assets under management (AUM) over the last six years (see Exhibit A below).
Exhibit A – ESG-centric products experience big jump in AUM
There’s been a significant jump in AUM for ESG-centric products, particularly during the past two years of the COVID-19 pandemic.
Asset managers are racing to address market demand but continue to face challenges with evolving regulatory and reporting frameworks, lack of foundational infrastructure needed to scale, and absence of trusted data to drive their product and operational strategy around ESG. These challenges are limiting their speed-to-market capabilities.
Market interest is undeniable and growing globally, driven by socially conscious investors. Bloomberg Intelligence predicts that by 2025, more than a third of the projected $140.5 trillion of global AUM will be sustainable investing assets. In addition, multiple surveys over the past 18–24 months confirm that climate and social factors continue to dominate the investing philosophy of institutional and retail investors; however, these are qualitative and may have regional biases or be pandemic related. There is also considerable marketing around the primacy of investment returns from ESG-themed products, but these causal relationships will need to be assessed and confirmed over a longer time horizon.
Regardless of these caveats, it appears that ‘sustainable investing’ will continue to form a significant part of asset managers’ go-to-market strategy over the remainder of this decade. In an environment where investors and regulators expect increased transparency into investment decisions regarding sustainability, fund managers are adopting several strategies to not just appear ‘green’, but also to establish concrete and clear messaging around their commitment to active, responsible investing practices.
We believe the key to success for asset managers will be to establish foundations that drive true long-term commitments to sustainable investing practices and not approach the space from a predominantly regulatory compliance perspective.
Three strategic ESG-related focus areas for asset managers
|Align the strategy to your key differentiators, client segments, and geographical footprint.||Prepare for the evolving regulatory and reporting requirements.||Enable robust, foundational data capabilities while allowing flexibility for evolving new data in various types and formats to drive reporting and analytics.|
Passive and active managers are taking different approaches in terms of providing ESG-friendly investment products. This can range from integrating ESG-focused vehicles into an existing product framework to…
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Read the full article by Ron Stuart, Executive Director, KPMG Southern Africa, as well as a host of other topical management articles written by professionals, consultants and academics in the April/May 2022 edition of BusinessBrief.
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