A new survey from the investment management association has revealed while sustainable investing accelerated through the COVID pandemic, there are calls for improved standards around ESG products to mitigate greenwashing.
Among the findings, 85 per cent of CFA Institute members surveyed across the world have reported they take environmental, social or governance (ESG) factors into account when investing, up from 73 per cent three years prior.
Currently, only 19 per cent of institutional investors and 10 per cent of retail investors invest in products with ESG factors – but 76 per cent of institutions and 69 per cent of retail investors have said they have an interest in ESG investing. The proportion of those interested falls to around 65 per cent in Australia.
But the majority of respondents (78 per cent) believe there is a need for improved standards around ESG products to mitigate greenwashing and to boost transparency around claims of sustainability.
Seven in 10 (71 per cent) agreed that alternative data or data derived from non-traditional sources such as the internet and social media, have the potential to improve the robustness of sustainability analysis.
CFA warns shortage in specialists
The vast majority (90 per cent) of investment professionals expect their firms’ commitment to ESG research will increase, up from 72 per cent two years ago.
There is now a resulting shortage of investment professions with ESG expertise, according to the CFA report, unable to meet demand rated as “very high”. A review of more than 100,000 LinkedIn investment professional job posts found in August, that approximately 6 per cent mentioned sustainability-related skills.
CFA had also analysed 1 million investment professionals on LinkedIn, finding less than 1 per cent had disclosed sustainability-related skills in their profile, despite 26 per cent growth in sustainability expertise in the last year. Women represented 42 per cent of ESG analysts, a considerably higher proportion compared to the 26 per cent in the overall sample.
The industry survey also forecast that professionals are expecting to see more ESG index tracking and quant funds, ESG thematic products, ESG multi-asset products, climate transition strategies, long-term engagement and stronger benchmarks.
The reasons for incorporating ESG in investment decisions however were varied. Client and investor demand was cited as one of the biggest factors for asset managers (59 per cent), as well as the need to manage investment risks (64 per cent).
Only 35 per cent said they considered ESG to improve returns, despite the outperformance of ESG indexes through the COVID crisis.
Lisa Carroll, chief executive of CFA Societies Australia commented the COVID crisis had accelerated the movement towards sustainable investing.
“With the COVID-19 pandemic, the health and safety of various communities has become a larger consideration,” Ms Carroll said.
“In addition, unrest over racial inequality in the US increased focus on social responsibility.”
The most used features were voted to be best-in-class/positive screening (used by 56 per cent of respondents) and ESG integration (53 per cent), followed by ESG-related exclusions (48 per cent). Voting, engagement and stewardship are used by 40 per cent, while thematic is used by 35 per cent.
Company ratings were found to be widely used, with 63 per cent of investment professionals using them as part of their data analysis. Almost three-quarters (73 per cent) expect the influence of ESG ratings on firms’ cost of capital to be greater in the next five years.
Two-fifths of investment professionals (40 per cent) have incorporated climate risk into their analysis, with the most common types of risk considered being physical and transition risks.
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Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].