Great Expectations: ESG

Our ESG Global Survey 2017 looks at the relationship between asset owners and asset managers, and how the obstacles to ESG are shifting around the world.

What’s next for asset owners and managers? ESG integration is the incorporation of ESG factors into financial analysis and investment decision-making in order to enhance investment returns and mitigate risk. Asset managers and asset owners plan to double their investment in ESG driven strategies over the next two years however, asset managers are concerned about the cost of incorporating ESG factors.

Our ESG Global Survey 2017 is based on a global survey of 461 asset owners and managers conducted during February to April 2017. We look at the relationship between asset owners and asset managers, how the obstacles to ESG are shifting, and at the different patterns of activity that are emerging around the world.

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 those 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 those asset managers that 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.

Challenges: the capability gap

There are challenges, obtaining and analysing ESG data will require new tools, resources and skills for both asset managers and owners.

The survey found that 55% of respondents (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 15% (22% of asset owners and 8% of asset managers) in two years’ time.

The ESG data challenge
The ESG data challenge

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. 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 and ESG specialists will step in.

Asset managers: cost and product concerns

Building new resources will require investment and asset managers are worried costs will mount. Asked about their views on barriers to deeper integration of ESG across their investment portfolios, 31% of asset managers cited costs as their biggest challenge over the next two years. It was 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 foresees this being of concern in two years’ time.

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.
Across the investment industry and around the world, there is clear recognition that ESG factors are of vital importance – to governments, regulators, and institutional investors – and ultimately to asset managers as they seek to satisfy their fiduciary duties and meet investor demand. Our report shows that there is expected to be a rapid rise in the number of ESG funds coming to market over the next two years. Yet despite the progress being made, barriers to even greater wholesale adoption remain.