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ESG investing - an exercise in change management
ESG investing - an exercise in change management
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ESG investing - an exercise in change management

05/12/2018

It’s been almost two years since we published our first examination of how organisations approach ESG investing. The results took us all by surprise, not least the intention of institutional investors to double their ESG investing over two years. Fast forward two years and we wanted to conduct the research again to see what has changed, and whether ESG intentions are here to stay in a bumpier market. Research is just back from field and we have the interim results based on the views of 340+ asset managers and asset owners around the world

People want to invest more in ESG

Here’s some positive news.

Over the next two years, nearly half (49%) of respondents expect 50-75% of their funds to incorporate ESG. Nearly two thirds (61%) expect their ESG portfolio to outperform over the next five years. However, respondents say it’s not possible to link outperformance to ESG factors alone.

The question we are asking ourselves is whether ESG investing can thrive in a bumpier investment market if people are unable to link ESG factors to performance.

The challenge of having the right ESG skillsets. Training is on the cards

Asset owners are looking for specialists and a proven track record from their asset managers. Over the past year, 54% of asset owners have awarded a mandate to a manager specifically due to their ESG capabilities.

But how do you become a specialist, and how do you gain the right skillset?

40% of respondents are looking to train incumbent teams in ESG principles and best practice over the next 12 months. Under a third are looking to hire new ESG talent from non-traditional backgrounds (i.e. from a sustainability consultancy or NGO). This is interesting because it suggests that ESG teams will become more diverse in the future but that the main focus right now is on reskilling existing teams.   

Organisation and the role of the CEO

Sustainability and ESG are really all about change management to existing strategies. ESG integration is challenging but slowly becoming core. 40% of respondents state that ESG is playing a growing role in their organisation’s investment strategy, although it is not yet central to their strategy. Just under a quarter (23%) state that ESG capability is embedded throughout the organisation.

ESG investment teams are at the coalface in terms of integrating ESG. This level of change and a different way of thinking requires leadership support, particularly if ESG is to be more than a marketing exercise. Our 2017 survey found far more bullish responses from the C-Suite as to ESG capabilities than responses from ESG analysts.   

For that reason, we could argue (you might not agree) that ESG investment teams should report directly to the CEO. That way CEOs are taking personal responsibility for ESG strategy and implementation. However, our survey finds that ESG teams generally do not report directly into the CEO. A fifth (20%) state that their ESG team or ESG specialist report to the CEO versus (31%) reporting to the Investment Director. Does there need to be a stronger ESG implementation link to the CEO if a firm is going to become the real deal?

Regulation is the driver. Data is the barrier

Regulation is coming and will accelerate the integration of ESG. 60% of respondents agree that policymakers will increase their requirements on ESG disclosure over the next 12 months. And a similar number (61%) are planning to dedicate more resources to ESG as a result.

There are obstacles of course and the biggest of these remains data. No change here from our 2017 survey. Inconsistent quality of data across asset classes remains the greatest challenge facing asset owners and their managers. It was cited as the most significant barrier to the adoption of ESG across the investment portfolio this time round along with the costs required to invest in new technologies. As a result, data aggregation/analysis is identified by respondents as the top priority for technology investment.

How does an organisation manage the analysis and data and the inconsistencies they face? Quite possibly in the use of external technology suppliers. Over the next two years, 52% of respondents are planning to contract third-party technology partners in support of ESG investing, – a smaller number are looking to develop these capabilities in-house.

The Sustainable Development Goals (SDGs) - the fabric of ESG investing?

And finally a point on cultural change. The SDGs are a change in thinking – they represent a new benchmark and broader approach to ESG. We were delighted to see that 65% of respondents are aligning their investment frameworks with the SDGs. Sadly, the main reason respondents are choosing not to align with the SDGs is due to lack of information/ data. Just under half (46%) of respondents state that the S (Social) is the most difficult component of ESG to assess and incorporate into investment analysis. It’s just possible that the SDGs can help with this.

The final survey will be published in March 2019. Contact your local BNP Paribas representative to receive your copy or check out our website closer to the date of publication.

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