Over the past year, the Future of Finance team at CFA Institute gathered insights from investment professionals around the world to better understand their views and vision for sustainability in investment management. Our recently released paper Future of Sustainability in Investment Management is informed by the views of more than 7,000 industry participants, including 3,500+ retail investors, 920+ asset owners, and 3,050+ investment practitioners. It considers a five to 10-year time horizon in terms of what investment professionals, investment organisations, and the investment industry must do to be better equipped to invest in a sustainable way.
The pressure is on for investment organisations to move toward the sustainable investing model, and the alternative of staying put leaves the investment industry vulnerable to decline. Our survey found that 85 per cent of CFA Institute members now consider environmental, social, and/or governance factors in their investing, up from 73 per cent in 2017. Their primary motivations are to manage investment risks and respond to client demand. We found the most used approaches are best-in-class/positive screening (used by 56 per cent of respondents) and ESG integration (53 per cent), followed by ESG-related exclusions (48 per cent). Voting, engagement, and stewardship are used by 40 per cent, and thematic is used by 35 per cent.
There are many challenges of sustainable investing, but as interest in the area continues to grow, there is a preparedness to tackle these issues, which are understandable flaws in a developing subject. Data, talent, and culture are areas for specific focus.
Data challenges and opportunities
ESG data is substantial and fast growing but unwieldy. Data practices will need to be able to better support decision making so that data goes from being part of the sustainability problem to becoming part of the sustainability solution.
Currently, ESG ratings are widely used, with 63 per cent of survey respondents using them as a part of their data analysis, and 73 per cent expect the influence of ESG ratings on firms’ cost of capital to be greater in the next five years.
Just 40 per cent of investment professionals surveyed incorporate climate risk into their analysis today, but interest is growing. In addition, 71 per cent of our roundtable participants said alternative data will make sustainability analysis more robust, and 43 per cent anticipate there will be useful applications of artificial intelligence for sustainability analysis. The need for greater data analysis plus a need for trust and human judgment when investing with a values orientation will necessitate an AI + HI (artificial intelligence plus human intelligence) approach.
Sustainability knowledge and skills must be developed to a critical threshold across the industry so that ESG thinking is embedded in all investment settings. An analysis of one million investment professionals on LinkedIn found limited supply of ESG expertise, with <1 per cent disclosing sustainability-related skills in their profile, despite 26 per cent growth in sustainability expertise in the last year. On the demand side, our review of 10,000+ LinkedIn investment professional job posts found that approximately 18 per cent of portfolio manager postings sought sustainability-related skills, and LinkedIn indicates “very high” demand for sustainability talent.
Training in ESG investing has increased, but only 11 per cent of respondents consider themselves proficient in the area. More than 70 per cent have interest in training, and many are starting now.
Among the investment professionals we surveyed, the structure of teams and their ESG responsibilities varied. About one-third of investment organisations have dedicated ESG specialists, a third have portfolio managers conduct any ESG analysis, and a third have no internal ESG expertise. For those with ESG specialists, about half are in a separate function and half are embedded in the investment teams.
The best structure can be related to the strategies employed, with roundtable participants suggesting that exclusionary screening can be done by ESG specialists who are not part of the team since they are simply asked to give a yes or no opinion based on screens. Similarly, if the focus is on impact, a centralised ESG team with a consistent approach is needed or it may be difficult to measure and report on impact. With an emphasis on ESG integration, however, everyone can carry out some sustainability analysis, and fund managers can have different views.
Although there is not a one-size-fits-all approach, most agreed that it is ideal for portfolio managers to learn more about this subject and to have a specialised resource available to teams for the technical aspects of ESG analysis.
Building a purposeful culture
While data and talent are important inputs, an organisational culture that supports sustainable investing will be a differentiator going forward. We need organisations to have enlightened self-interest propositions at their core, meaning that they recognise there is a win-win for clients and the firm when it comes to sustainability. Organisations can demonstrate commitment to sustainability innovation through organisational agility in people and processes and iterative improvements.
We are at a threshold moment for the investment industry as we view the paths ahead and decide which to take. In sustainable investing, we have the ingredients for the sustainability of investing. Investors and the investment industry have a considerable role to play in determining the pathway and shaping a future worth investing in.
Future of Sustainability in Investment Management was co-authored by Rebecca Fender, Robert Stammers, and Roger Urwin.