New report highlights IDEAs set to push industry along path to sustainable investing
Rather than a passing fad, the growing interest around ESG reflects the natural next step for the investment industry as a whole, according to the CFA Institute.
Drawing from the views of more than 7,000 industry participants including clients, investment practitioners, and ESG specialists, a new report from the institute titled The Future of Sustainability in Investment Management: From Ideas to Reality, emphasized how the long-term focus of sustainable investing makes it a natural fit for the industry’s mission to serve society.
“This moment represents a valuable opportunity for organizations to address this challenge and help shape a future worth investing in,” said Margaret Franklin, CFA, president and CEO of CFA Institute.
Following a four-pillar IDEA framework, the report highlighted the influences, drivers, enablers, and actions needed for the sustainability movement to truly take hold.
Influencing the sustainability movement is the growing momentum on several fronts. Signatories to the Principle for Responsible Investment (PRI) have increased by 28% to 3,000 entities in the first half of 2020 alone, with AUM growing 20% to US$100 million. The number of investment organizations considering ESG factors due to client demand has risen markedly in the last three years, jumping by 20% since 2017 to 65% in the Americas alone. COVID-19 has also made investors more focused on the vulnerability and resilience of the financial system, further fuelling discussions around sustainability.
Focusing on drivers, the report said that while just 19% of institutional and 10% of retail investors are currently invested in products that incorporate ESG, 76% of institutional investors and 69% of retail investors have an interest in ESG investing. Among those who have values as an investment objective, 73% of institutional and 67% of retail investors expressed a willingness to sacrifice some return to achieve their values objective. From an investment model perspective, the most prevalent strategies among professionals surveyed were positive screening (used by 56%); ESG-related exclusions (48%); voting, engagement, and stewardship (40%); and thematic (35%).
Looking at factors enabling sustainability, the institute found 63% of the investment professionals it surveyed use company ESG ratings in their data analysis, and 73% expect ratings to have a greater impact on firms’ cost of capital within the next five years. Four tenths of survey participants said they incorporate climate risk into their analysis, most commonly physical and transition risks; among those tapped in industry roundtables, 71% agreed that alternative data could potentially make sustainability analysis more robust, and 43% expect artificial intelligence to benefit the sustainability movement.
The institute also underscored a considerable shortfall in ESG investing expertise. It reported around one third of investment organizations have dedicated ESG specialists, and one third have portfolio managers that conduct ESG analysis. While training in ESG has increased, fewer than half of respondents said their firm offers ESG training; just 11% considered themselves proficient in that area, and an equal number are being trained.
“We suggest that the industry must make a transition toward increased adoption … and increased effectiveness and impact of sustainable investing,” the report said.
To guide actions needed for progress, the institute suggested a rubric that included the following elements:
- ESG education;
- System-level thinking;
- Collaboration synergy;
- ESG data;
- Sustainability innovation; and
- Purposeful culture.
“Within sustainable investing lie the fundamental elements of the sustainability of investing,” the report said.