Contributing Firms:
ESG:
Concerns around the quality and the consistency of ESG data and standards and related commentary around greenwashing are a persistent feature of the narrative around ESG investing. What are your overall observations on the trends that the asset management industry must address most urgently in 2023 in this regard?

Meliosa O’Caoimh, Country Head, Ireland, Northern Trust: A consistent challenge all asset managers will have is how to demonstrate and justify they are ESG-focused and ESG-compliant to investors. And firms should ensure they carefully consider the reasons for launching a new product before they release it to the market.

For example, in our survey of 300 global asset managers last year, 61% of C-suite respondents reported that they planned to launch or increase their ESG options. However, just 27% plan to expand their product set. It may be that firms plan to convert existing products to ESG offerings – if so, they should ensure this is a genuine transformation, offering substantive value to their investors.

In the same survey, we also asked those respondents interested in expanding into ESG to outline the biggest challenges. Here, there was a fairly even split between setting standards and goals, data sourcing and consistency, and technology limitations.
Frank Talsma
Frank Talsma

The emphasis on data and technology suggests that asset managers could benefit from working with experts who can help them access better information, meet reporting requirements, and make more sense of the data they have.

Frank Talsma, Head of Data and Risk & Investment Analytics at RBC Investor & Treasury Services:The current macro environment characterised by high inflation, market volatility and energy supply disruption is seen as a headwind for advancing broader issues around climate change and socio-economic inclusion. Yet at the same time we observe unprecedented amounts of institutional money looking to invest in ESG and sustainable products. Therefore a key focus for 2023 and the coming years will be to restore trust in the ESG and sustainable investment landscape. This can be achieved through:

• raising the bar on ESG-aligned product launches/strategies
• independent verifications of ESG performance criteria
• transparent and easy to understand reporting
• increased adoption of industry and regulatory standards

Success will mean access to better tools and information to enable better investment decisions based on consistent and comparable ESG data. There is still a long way to go in this field.

As ESG business activities and client demand continues to grow, firms are in a period of heightened client and investor attention on mitigating legal and reputational risks of greenwashing. Effective governance and oversight and overall awareness of ESG issues along the investment value chain are becoming increasingly important.
Rachel Gavigan
Rachel Gavigan


Rachel Gavigan, Senior Analyst, Sustainable Investing Oversight, MJ Hudson: The regulatory expectations have now caught up with disclosure requirements and ESG data continues to be a challenge heading into 2023. Investors seek high quality metrics while SFDR disclosures demand consistent and reliable data. Reporting requirements under the Corporate Sustainability Reporting Directive are expected to improve the availability and quality of ESG-related data on companies however this regulation will not be effective until 1 January 2024. Calls for regulators to formally carry out oversight on the ESG ratings and data providers continue into 2023 with the EU and UK regulatory bodies indicating this is on their radar.

With increased scrutiny from the regulator and fines issued in 2022, greenwashing has developed into a legal and reputational risk for asset managers. Greenwashing can be intentional, misleading and mis-selling to investors but also unintentional, with much confusion still around the definition of sustainable investing leaving too much room for interpretation along with a lack of consistent data. The regulators have suggested areas to combat greenwashing including consistency around ESG related information within investor documentation and clarity from ESMA on minimum thresholds for funds with ESG wording in their names. Greenwashing fears have seen a trend of declassifications from Article 9 to 8 which is expected to continue into 2023. Firms must ensure they are applying ‘best efforts’ in implementing adequate controls to avoid the risk of greenwashing as scrutiny continues to intensify.

Desmond Flood, Portfolio Manager, IQ-EQ Fund Management (Ireland) Limited:
Desmond Flood
Desmond Flood
Last year was challenging for the asset management industry. Aside from the macroeconomic backdrop, environmental and social issues (which are central to ESG integration) came under increased scrutiny, spearheaded by regulation in the form of the EU’s Sustainable Finance Disclosure Regulation (SFDR). Reporting on the EU Taxonomy and Principle Adverse Impact indicators presented an additional hurdle for asset managers. Many of the concerns around greenwashing have now been dealt with, given the rise in transparency and the binding criteria required in fund documentation.

This has already forced many funds to ‘downgrade’ from Article 9 to Article 8 status. With other regulators following suit, it will be interesting in 2023 to see how ESG fund names and labels change as managers are held to account.

Asset managers will have to continue assessing the quality and consistency of data presented to them for some time to come. Digging deeper, we have to ask: will the use of Renewable Energy Credits (REC) be acceptable as an offset to GHG emissions, and how do you compare one company using RECs to another that does not? The measurement of both biodiversity and Scope 3 emissions data remains patchy, and Net Zero targets by companies need to be scrutinised. Targets for 2050, without interim milestones, are only passing the buck to the next generation. Improved corporate reporting and company engagement will be the answer in the long run.