The concept of responsible investing has been around for as long as investing itself, but the more comprehensive view of Environmental, Social and Governance (ESG) investing has been of growing importance over the past few years. Going into 2018, the topic is top of mind for investors, asset gatherers, and asset servicers alike. While skeptics have reservations around how “ESG-friendly” these self-proclaimed “responsible” products truly are, there remains rising demand from investors, with ESG quickly evolving into an investor requirement and driving new thinking at asset servicers.
The undercurrent for ESG evolution originates from the rise of the millennial investor, a generation of investors estimated to outnumber baby boomers by 22 million by 2030.1 Analysts believe that a transfer of wealth from boomers to millennials will take place over the next decade, leading to an estimated $15-20 trillion of asset inflows over the next two to three decades.2 Meanwhile, global industry leaders like Larry Fink, CEO of BlackRock, are responding not only in their actions but in what they ask of others. In a recently released letter, Fink asked fellow CEOs to “publicly articulate [their] strategic framework for long-term value creation,” while also demonstrating they “understand the societal impact of [their] business.”3
THE STANDARDIZATION OF REGULATION
While notable institutions like the Sustainability Account Standards Board (SASB) and the United Nations Principles for Responsible Investment (UN PRI) have made incremental progress towards unifying ESG standards and best practices, the standardized global regulatory framework, or lack thereof, remains largely fragmented and regional. In France, President Macron’s Article 173 introduced a robust basis for mandatory reporting of ESG data by financial institutions. Many hope this will form a basis for an EU or even global ESG framework. However, large-scale adoption will be an uphill battle across the EU, and more so globally, as major markets such as the US and China are already developing their own ESG standards.
As demand for ESG products continues to gain momentum, with an increasing likelihood of evolving into a requirement for most investors, asset managers will need to make key decisions around their ESG strategy, ranging from the products they sell to how they operate their businesses from an ethical standpoint. While there are multiple ESG-focused organizations at the disposal of asset managers for analysis work, managers will need to assess which specific ESG issues will affect each industry and asset class of investment, and integrate these principles into their product suite.
The appetite for ESG reporting and disclosure is also introducing big data technologies such as natural language processing, AI and machine learning. Asset servicers are exploring new ways of using technology to provide ESG information to investors, as well as helping asset managers develop their ESG strategies and drive outperformance.
- Do you recognize ESG as playing a critical role in the future of the asset management and asset servicing industries and how are you aligning?
- How does your firm align your corporate strategy with ESG principles?
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1 Bank of America Merrill Lynch – Equity Strategy Report, December 2016
3 Larry Fink’s Annual Letter to CEOs, January 2018