Asset managers and asset owners plan to double their investment in Environmental, Social and Governance (ESG) driven strategies over the next two years, according to a survey from BNP Paribas Securities Services.
The report, “Great Expectations: ESG – What’s next for asset owners and managers”, found widespread adoption of ESG factors into investment decision-making. According to the report, 79% of respondents incorporate ESG, either in how they invest, as asset owners, or in terms of the products they market, as asset managers.
Of the 77% of asset owners that incorporate ESG, the survey found nearly half have 25% or less invested in specific ESG strategies but plan to increase this to 50% or more over the next two years.
Similarly, of the 80% of asset managers which incorporate ESG, 40% currently market 25% or less of their funds as either ESG or responsible investing funds. However, this figure is set to climb significantly over the next two years, with more than half (54%) planning to market 50% or more of their funds as ESG products in two years.
Sid Newby, Head of asset manager and asset owner sales at BNP Paribas Securities Services, said:“There is set to be a huge shift in the way investments are selected over the next two years. It is widely accepted that incorporating ESG can be beneficial to returns, but what we will see now is firms really putting investment weight behind this.
“However, there are challenges. Obtaining and analysing ESG data will require new tools, resources and skills for both asset managers and owners and so we expect technology to play an extremely important role in helping them meet their goals.”
Challenges: The capability gap
The survey found that 64% of asset owners and 47% of asset managers are concerned that a lack of robust data could act as a barrier to greater adoption of ESG today, though this drops to 22% and 8% respectively in two years’ time.
A lack of advanced analytics is also a significant concern for both respondents, with almost a quarter (23%) citing this as a future barrier, suggesting the need to invest in technology and specialists.
Commenting on these findings, Trevor Allen, Product specialist, investment risk and performance at BNP Paribas Securities Services, said: “While the industry expects to capture data effectively within two years, the ability to draw conclusions from the data will remain a challenge. That is where smart data, artificial intelligence and ESG specialists will step in.
“We expect to see both managers and owners really ramping up their tech and personnel capabilities to address these needs in the coming years.”
Asset managers: Cost and product concerns
Building new resources will require investment and asset managers are worried costs will mount. The survey found 31% expect this to be their biggest challenge over the next two years. This is also the single most important future barrier cited by all respondents.
28% of asset managers are also concerned they do not have the ability to meet asset owners’ product needs with regards to ESG. The same number foresee this being of concern in two years’ time.
Sid Newby concluded: “Asset managers will need to work closely with owners to understand their ESG needs and design products suited to them – but this will require investment.”
Alternative asset classes becoming increasingly ‘ESG aware’
The study also identified a planned shift in ESG allocation over the next two years, into alternative assets. Asset managers and owners expect their investment in ESG alternative assets, including hedge funds, infrastructure, real estate and private equity and debt, to increase by 20% in two years. Conversely, ESG allocation towards public equities in developed markets – which represent almost half of ESG allocation now – is expected to fall by 26% over the same period.
Trevor Allen added: “Perhaps in contrast with common perception, alternative asset classes are becoming increasingly ‘ESG aware’. Private equity firms, for example, want to ensure they can achieve a timely and quick exit from an investment and so are incorporating these factors when structuring their portfolios.
“There have been issues around a lack of standardisation in the alternative space. However, recent initiatives such as the Global Real Estate Sustainability benchmark and the PRI’s responsible investment due diligence questionnaire for hedge funds, are starting to have an impact and bring much needed transparency for investors.”