ESG is maturing but how does that look to asset managers?

ESG factors will be part of most global asset managers' portfolios in the next decade according to Index Industry Association (IIA) research

ESG is maturing but how does that look to asset managers?

Environmental, social, and governance (ESG) is becoming increasingly engrained in investing according to an international poll of asset managers.

It is expected that ESG will be part of half of portfolios globally within the next few years and part of 63% in 10 years’ time (up from 52% two years ago) according to the Index Industry Association (IIA).

The research found that 54% of asset managers in the US, UK, France and Germany said ESG has become more of a priority in the last 12 months.

Given an increase in anti-ESG sentiment that is strongest in the US, 88% of asset managers south of the border agree that ESG has become more important recently.

“Our survey seeks to help index providers better understand the needs of the asset management community and provide benchmarks and indexes that better meet their needs,” said IIA CEO Rick Redding. “Our survey results affirm that asset managers continue to prioritize ESG criteria in making investment decisions and demonstrate the managers’ desire for more, and more accurate, ESG data.”

This tallies with a recent survey of family offices globally where ESG is also becoming a key component of their investment strategy.

Broadening the brief

While much of the focus of ESG in recent years has been on the environmental piece, the IIA results show an increasing focus on the other elements and a broader view of the ‘E’.

Environmental considerations continue to include climate change but are also seeing greater focus on depletion of natural resources, sustainable supply chains, and resilience of physical assets.

These factors now outrank greenhouse gas and carbon emissions in importance, according to survey participants.

On the social side, investments displaying positive social criteria are a core part of all or most portfolios with US asset managers leading in making this part of their investment decisions.

Finally, on governance, fair business practice, accounting transparency, and management diversity are all key.

The range of asset classes that are viewed through the ESG lens is also expanding beyond equities.

Commodities are notable here with 62% of asset managers implementing ESG in this class in 2023, compared to just 37% in 2021, and more than half of respondents expecting this to increase in the next 12 months.

Better data

New technologies including AI are helping to improve ESG data.

But among the biggest challenges cited by global asset managers are lack of data standardization across markets (30%), insufficient quantitative data (29%), and a lack of agreed ratings and methods by providers (24%).