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Environmental, Social and Governance (ESG) investment defies simple characterisation. The asset management industry has seen a proliferation of ESG terminology, nomenclature, taxonomies and frameworks making it difficult for institutional audiences to make meaningful comparisons between different firms’ values and approaches.
One thing is clear though: investor appetite is huge and continues to grow at an impressive rate. But this remarkable growth story has not been an unmitigated blessing. The high pressure on asset managers to create content that will educate, inform and engage their audiences on these topics has led to content that has often come at the expense of clarity or real thought leadership. At its worst, it has led to claims from industry observers, not always unfounded, of “greenwashing”.
Our research found that, in 2019, there had been a 67% increase globally in ESG related content from asset managers across tier 1 media, and output in specialist ESG and sustainability media has increased by 76%. In parallel, we saw a corresponding 63% increase in searches globally for ESG-related content. However, 34% of the topics we assessed are ‘over-indexed’ by the market, with more content provided on these themes than there is organic demand. This highlights the real disconnect between what asset managers are putting out and what their audiences are looking for.
From analysing over 70 different themes, the breakdown of the topics discussed in the media shows a large amount of ESG coverage coalescing around a handful of themes. Alongside the more obvious themes like the environment, social issues and governance concerns, other over-indexed topics include performance, integration, equities and climate change. Overall, we found that the content produced is heavily weighted towards generic material and that more specialist themes are under-represented relative to the organic interest in them from target audiences. The four key areas providing unique opportunities for asset managers to make meaningful contributions are materiality & measurement, data transparency & supply chains, active ownership and private markets.
Materiality & Measurement
Nearly all the firms assessed mention the importance of ESG analysis in driving strong long-term results, reducing risk and improving returns in their corporate descriptors. Measurement and materiality sit at the heart of this conversation.
There are a number of key elements to the conversation around materiality and measurement. Firstly, it’s important that managers communicate clearly to companies how they can properly meet the desired reporting standards, as well as highlighting areas for improvement. Secondly, there is more work to be done in explaining to investors how materiality is built into the investment process. This is especially important as many firms have their own approach in addition to, or building on, industry frameworks, like that developed by the Sustainability Accounting Standards Board. The profusion of approaches creates more confusion than clarity with investors. Consequently, this is an area where firms need to ensure they have communicated their approaches and their edge clearly.
Data transparency & supply chains
As investors demand for ever greater data transparency from ESG managers increases, whole industries and faculties are growing in lockstep to meet this need. Supply chain transparency is one area where greater reporting clarity is needed.
Here, technology has started to provide real value to ESG investors. Consider the use of blockchain to create end-to-end traceability for tuna – all the way from sea to table – to the use of drones and satellite data to assess the impact of cattle grazing on deforestation. Technology is producing novel data sources that can help managers have far greater transparency of risks further down the supply chain than ever before.
Importantly, the implementation of novel solutions, using technology to provide more data and better transparency will also create opportunities for asset managers to communicate these stories to investors. Alternatives managers have long used alternative sources of data as a differentiator and a source of edge, and now the world of responsible investment has a similar opportunity.
The four key areas providing unique opportunities for asset managers to make meaningful contributions are materiality & measurement, data transparency & supply chains, active ownership and private markets.
Active ownership is a key topic where there is a real opportunity for those asset managers whose own behaviours allow them to contribute authentically on this theme.
Although there is not yet a huge amount of academic research on this topic in the context of ESG investing, ‘Active Ownership’ (2013), Dimson, Karakaş and Li showed that successful engagements by asset managers with US public equities during the period 1999-2009 were able to generate an abnormal return of +4.4% during the year after engagement. Clearly, there is a real appetite from investors for content pertaining to how active ownership approaches can create value for ESG investments.
However, there is also a risk inherent in an asset manager promoting itself as a leader in active ownership unless these claims are able to be justified. In December 2019, activist hedge fund TCI’s manager, Sir Chris Hohn, in a letter seen by the Financial Times, called out BlackRock for greenwashing, and criticised its “appalling” record on climate change resolutions.
2020 looks to be the year when ESG takes on private markets. Both KKR and TPG, who manage around $330bn in assets between them, have pledged to reveal the positive social and environmental impact of their investments.
Private markets are critical to the conversation surrounding ESG and impact investment as they offer firms new ways to deliver value for investors. However, there is still a long way to go in terms of standardising reporting and best practices to ensure consistency and quality of ESG reporting across the industry, and this applies to LPs, GPs, portfolio companies and asset managers with private markets capabilities.
ESG investing is growing at a staggering pace, with new generations of investors unsatisfied just by great returns. Organic search on a multitude of themes has corresponded with a steep rise in content generated by asset managers, often over-supplied, and sometimes perceived to be “green washing”.
However, there are a number of key topics that are yet to receive the same attention, despite genuine demand. This is where the opportunity is for the most sophisticated asset managers to contribute to the ESG conversation in a meaningful and powerful way. But in order to do so, they will need to break ground in these less well trodden areas in order to find ‘White Space’ and to build category authority around these topics and where they have real capability.
Anthony Payne is the CEO of Peregrine Communications