ESG isn’t a project. It isn’t about appointing a team who can bolt sustainability on to an asset management operation. To win the trust of investors, staff, regulators, civil society, the press, ESG must be embedded in strategy, the LuxFLAG Sustainable Investment Week 2022 was told on Monday.
“Usually when we’ve seen greenwashing issues or mislabelling issues, in most cases it’s unintentional,” said Frédéric Vonner, Advisory Partner at PwC Luxembourg, commenting on the firm’s soon-to-be-published “Exponential expectations for ESG” report. The results of the global survey of 250 asset managers and 250 institutional investors conducted by the audit/consulting firm were previewed at the Luxflag Sustainable Investment Week 2022 on Monday 17th October.
Mislabelling prevalent
No less that 71% of institutional investors surveyed believed that mislabelling is prevalent within the asset and wealth management industry. This figure rises to 86% for asset managers. Yet this is despite Vonner stating: “there is no generalised intention from asset managers to do greenwashing.”
“A lot of the mislabelling comes from miscommunication internally,” said Dariush Yazani, Global AWM Market Research Centre Leader, also at PwC Luxembourg. “It happens because there is no strategic roadmap, but rather a team is created which is told ‘do ESG for me,’” he added.
Boards define identity
Boards have to get involved to define the asset manager’s ESG identity. Yazani advised against being too categorical: neither being ESG sceptical and rejecting this trend out of hand, nor being over-enthusiastic and losing sight of costs. “Align your corporate strategy with ESG strategy, not in reaction to short term events,” he added.
Seven out of ten (71%) institutional investors told the survey that they would be in favour of strengthening ESG regulatory requirements for asset managers as a way to bring transparency. Yet the rules have to be good quality. “Both asset managers and institutional investors said they recognise that regulation might be a major obstacle when it comes to ESG growth,” said Vonner. “More regulation is wanted, but in the sense of clear, simple and less complex regulation,” he added.
Organisational buy-in
So without this, asset managers have to generate transparency themselves though full strategic integration, argued Yazani. “A roadmap has to be developed by CEOs and boards who have to set this strategy. This should be based on prior communication with stakeholders – investors, employees and others – to find out what they want,” he said. He recommended setting realistic, near-term objectives which address identified challenges and opportunities from a clients’ point of view. He prefers this approach to grand sounding, but potentially fraught, vague promises, such as achieving net-zero in the next five years.
“Then the CEO has to ensure there is organisational buy-in and that momentum is built,” Yazani said. “They have to set the tone at the leadership level, because if the CEO and management don’t believe in ESG any they are only paying lip service and not living those values, investors are going to hold you responsible for that,” he added.
The survey showed that while details about the portfolio are most relevant to investors (two-thirds want reporting at this level), well over half want this at the manager level. Just a quarter want data relayed to them about underlying portfolio companies. This means identifying KPIs for every aspect of E, S and G and developing procedures to meet their demands.
This is not least because the survey suggests that governance is set to become a more relevant factor for investors. To a large extent due to a growing belief that good governance standards by themselves help to generate desired environmental and social outcomes, Vonner said. While the environment is the most prevalent of ESG aspects in institutional investors’ investments now (44%) and will be in two years’ time (42%), governance is set to rise from 17% to 27%, the survey said.
Huge potential prize
While a fundamental rethink will be hard work, the conference was reminded of the potential upside. Yazani pointed to Lipper/Prequin/PwC data that forecasts compound growth of assets under management of 12.9% in the ESG space in the five years to 2026, a figure three times that of all fund AuM. The survey pointed to 40% of newly launched funds in Europe being ESG. He noted that much of this is retrofitting, but from 2023 this should start to be mainly new funds. “This is not an investment trend. This is a value shift,” he said.