However, instead of these regulatory pressures causing hesitancy amongst Asset Managers, we’re seeing them actively looking for and harnessing the opportunities that ESG brings to the investment market, and capitalising on very strong demand in the segment from European investors.
The Investor Profile is changing
Globally, sustainable investing is on the rise; a recent EY study found that 78% of investors want companies to focus on ESG activity. However, outlooks differ hugely across generations.
Our Global Wealth Management Survey showed that younger investors want investments that generate returns yet still contribute to society and will select an asset manager based on their knowledge and range of sustainable investments.
Fergus McNally
Developing their capability in sustainable investing, and building their suite of sustainable products, asset managers can tap into this growing investor segment and capitalise on the opportunities in the space.
Furthermore, intergenerational wealth transfers are becoming more significant, leading to a heightened focus on ESG policies and commitments among family offices and sovereign wealth funds.
As an example, the Norwegian Sovereign Wealth Fund has publicly stated they “would like to do more on climate but also consider other areas across the ESG spectrum” and is very influential in the space. They have set an expectation that all companies achieve net zero before 2050, and earlier this year filed a number of shareholder proposals for companies to set out their plan to achieve this. They also have a record of voting against other investee companies in areas of executive pay and corporate governance this year. Proposals by the Financial Conduct Authority (FCA) for a standardised vote reporting could see more asset managers feeling pressure to exercise their voice as a shareholder in line with the wishes of their investors.
As the transfer of wealth from older to younger generations continues, ESG principles will play a crucial role in investment decisions and portfolio management.
Data unlocks investment insights
ESG disclosures call for more detailed data across the value chain – this will give asset managers greater access to information, which in turn will lead to better and more informed investment choices.
Asset managers will be able to evaluate companies on a far more granular level than ever before. They will now monitor the progress of organisations in meeting their ESG commitments, for example by assessing environmental impacts like their carbon emissions; social impacts such as employee diversity; or governance factors like the tenure of board elections. This information wasn’t readily available 5 years ago and represents a unique opportunity for asset managers carrying out due diligence into investment options.
With access to better datasets on their investment universe to analyse, asset managers can make more informed investment choices that ultimately align with their clients’ sustainability objectives.
The Investment Opportunity in funding the cost of transition
The cost of transitioning to a net-zero economy requires a huge level of investment. Governments and companies have pledged trillions of dollars towards their transition goal, with US$130 trillion being pledged at COP 26 alone. In order to meet this, investments will be required across various sectors, including energy, transportation, and housing. However, governments and companies cannot raise all the necessary capital on their own. This creates a sizeable funding gap.
Gerard Crossan
Governments and companies will look to the capital markets and asset managers to help raise the necessary capital and manage essential infrastructure projects. This is a massive opportunity for asset managers to apply their knowledge and experience in pinpointing opportunities for growth, steering investors towards the most appropriate funding model.
The amendments to the European Long-Term Investment Fund (ELTIFs) regime have expanded the scope of eligible investments and removed some of the barriers to retail investors. ELTIFs now have the potential to become an attractive “go-to” fund structure for long-term investments. We expect the new ELTIFs regime to become a key tool to mobilise capital and finance the long-term projects needed for transition in these sectors. They’re likely to play a significant role in bridging the funding gap.
Once-in-a-generation opportunity for Asset Managers
Asset managers can now become an integral part of the ESG movement. Demand and momentum have both been building amongst the investor community -they are now looking to target asset managers based on their range of sustainable investments.
Regulators (in Europe and further afield) are swiftly introducing disclosure regimes for companies, leading to standardised disclosures, and enabling asset managers to delve into structured datasets as they evaluate their investable universe.
Public commitment across the world to transition to net zero has identified a clear need for investment across a range of sectors where asset managers are uniquely placed to allocate capital, close the funding gap for these projects, and ultimately benefitting from the returns.
By leveraging these opportunities and embracing the sustainable investment power of ESG, asset managers can create positive social impact, drive value creation, and contribute to a more sustainable future.
Rather than shying away from the regulatory pressures surrounding ESG, asset managers are actively embracing the opportunities it presents.