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ESG’s value equation

by Sean Kearns, Editor-in-Chief, Longitude

The cost of failing to act on ESG is clear. But can we be so sure of the cost of acting?

New research among FT subscribers underlines the high strategic priority firms are now placing on sustainability. But how firms approach and fund their ESG strategies – from collecting and analysing the most useful data to putting talent in place – remains a work in progress.

Almost half of the 232 investment professionals surveyed (49 per cent) say they have some way to go to embed ESG best practice across their organisation, and 38 per cent worry that they are still failing to measure what matters when it comes to ESG.

What matters is, of course, the subject of much debate, and the effort to chisel out a single set of ESG reporting standards continues, while criticism of the real-world impact of ESG funds has led to an increased focus on ratings and rankings,.

Whether it is to meet regulatory demands, or realise investment opportunities, sustainability is affecting decision making across every aspect of firms’ operations.

Forces of change

The growth of sustainable funds shows no sign of slowing. The cost of ESG research and the need to recruit specialists or investment analysts with deep knowledge of the area both seem set on an upward trajectory.

With this growth, firms are subject to a widening range of both ‘push’ and ‘pull’ factors around sustainable investing. Nearly half (46 per cent) of respondents say that they are integrating sustainability into their investment decision-making process in order to meet demand. In parallel, 45 per cent are doing so in response to increased pressure from stakeholders. Regulatory demands add a third source of pressure on firms to change their operations. And such change costs time and effort, as well as money.

“If you’re taking ESG seriously, it deserves a big in-house investment,” says Amundi’s Chief Investment Officer Vincent Mortier. “Just buying some data or ratings and disseminating to portfolio managers is not an integrated or long-term approach.”

So, how can firms deal with these multiple demands?

Pooling resources to make them last

Individual firms can’t act alone if they are to help meet the need for improved disclosure, particularly on climate issues and risks. ESG Book, is one example of a group of financial institutions, investors and businesses, that has been come together to provide comparable, transparent data on 9,000 companies.

Specialist insight into building sustainable business models will be at a premium. Many governments have set ambitious Net-Zero targets and corporates are looking for smart ways to access the data that they need to match their public commitments, particularly on climate and Scope-3 emissions.

When it comes to supporting sustainable investment decisions, firms can look to OS-C, an open-source collaboration supported by firms including BNP Paribas, Goldman Sachs and Allianz. It aims to build a new software platform integrating data modelling, cloud computing and AI tools to support climate-integrated investing.

The sustainable future will be built on these kinds of collaborations, according to Carina Silberg, head of governability and sustainability at Alecta. “It makes more sense that we work together through organisations such as the Net-Zero Asset Owner Alliance,” she says. “Together, we can tap into collective intelligence. What is the latest scientific research? What does that mean for asset managers? And how can we reflect new approaches in our models?”

The right ESG strategy attracts the right people

The need to tap into new partnerships and new data sets also requires a more strategic ESG talent-acquisition strategy, especially given the pool of talent available.

While the research suggests there are multiple viable strategies for assembling and embedding ESG knowledge in teams (from building in-house to fully outsourcing), opting out of the competition for specialist talent is not one of them.

“ESG has got to be the single biggest, hottest talent area right now in our entire industry,” says Doug Sharp, head of EMEA at Invesco. “We need to bring on board those ESG experts that can partner with clients and partner with our portfolio managers, to make sure we are delivering the solutions that our clients want.”

Success in the competition for new ESG talent, the heat from which is being felt across sectors, has the potential to lead to competitive advantage and a virtuous circle: 59 per cent of respondents believe that their commitment to ESG will become an increasingly important factor in attracting the best investment talent.

As stakeholders become more exacting in their ESG demands, investment managers will need to become more precise in calculating their value equations – weighing up the cost of data, the value of talent and the worth of partnerships.

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