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How can asset managers prepare for ESG investment, today?
Asset managers need to reevaluate how they conduct business in response to the physical, market and regulatory impacts of climate change and sustainability issues.
In brief
- Now: Understand alignment with regulatory expectations
- Next: Strengthen risk management framework and develop key initiatives
- Beyond: Implement strategic initiatives to fully integrate ESG factors into the firm’s value proposition and increase competitive advantage
Recognition of the positive impact of ESG activities on business operations and value, as well as the increasing demand by the investors for more information on how corporates manage their ESG risks, has resulted in a rapidly changing global regulatory landscape in ESG matters.
Insights from the report How can asset managers prepare for ESG investment, today? say that by integrating ESG considerations on a holistic and fundamental basis, more information can be gained by both improving protection against risk and better pricing the assets managers are investing in.
How managers respond to the market impacts during COVID?
There is a global trend for organizations to respond to the risks and opportunities related to these impacts, as well as an increasing expectation regarding the adoption of ESG-incorporated practices, from both regulated and non-regulated parties.
In order to realign and prioritize long-term value creation and gain competitive advantages in the coming years, an increasing number of asset managers are considering or have already incorporated ESG research and portfolio management into their investment process.
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Chapter 1
Opportunities and challenges
Other than the ESG disclosures, investors are looking for investments that incorporate impact investing.
Investors are increasingly asking whether asset managers have considered the ESG risks and whether such risks have been adequately addressed. They are assessing not only the financial performance but also the nonfinancial factors of the underlying investments. According to the 2020 EY Climate Change and Sustainability Services (CCaSS) Institutional Survey, 72% of investors surveyed conducted a structured methodical evaluation of nonfinancial disclosure – a significant jump from the 32% in 2018.
According to the 2019 Annual Impact Investor Survey by Global Impact Investing Network(GIIN), the overall impact investing AUM was estimated at US$502 billion as of the end of 2018. Asset Managers accounted for approximately 50% of the estimated AUM, reflecting the fact that investor preference for ESG factors were becoming mainstream. Asset managers are responding to these needs by offering ESG integrated funds with impact investing strategies, or by focusing on specific social or environmental theme or outcomes, such as decarbonization, high-impact disease research and greenhouse gas emissions.
Asset managers are facing several challenges to address investors’ needs and concerns, such as:
- Limited availability of data
- Lack of expertise on ESG issues
- Difficulty in identifying if ESG factors are integrated to the core
- Cultural challenge of viewing ESG as a compliance exercise rather than a value creator
The Securities and Features Commission (SFC) launched a consultation in October 2020 on a proposal to amend the Fund Manager Code of Conduct (FMCC) and set out baseline requirements and enhanced standards for fund managers in order to strengthen the investment and risk management and disclosure of climate-related risks.
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Chapter 2
Key priorities for asset managers and other industry players
Asset management should understand areas for development and focus on implementing strategic plan.
Now:
Understand alignment with regulatory expectations
- Strengthen ESG governance and focus on capacity building
- Conduct ESG disclosure and reporting
- Lean forward to develop exclusion lists which prohibit the investment for projects with adverse environmental and social risk
Next:
Strengthen risk management framework and develop key initiatives
- ESG due diligence
- ESG risk assessment and management
- ESG investment principles
Beyond:
Implement strategic initiatives to fully integrate ESG factors into the firm's value proposition and increase competitive advantage
- Environmental stress testing
- ESG performance analysis
- Responsible ownership and monitoring
By integrating ESG considerations on a holistic and fundamental basis, more information can be gained by both improving protection against risk and better pricing the assets managers are investing in.
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Chapter 3
What services can we offer to asset managers?
EY seeks to assist firms in creating a strategic plan
ESG Investment Strategy Advisory
EY CCaSS team aims to provide clients with broad range process ESG investment advisory services, which are designed to help clients address emerging ESG opportunities, manage risks, reduce compliance costs, and improve operational and performance effectiveness.
ESG Performance Analysis Services
EY ESG Performance Analysis model intends to help investors understand ESG risks and opportunities.
ESG Risk Management Advisory
EY CCaSS team assists clients in the corporation of ESG factors and in improving or developing risk management systems with integrated leading consulting metrics. EY ESG risk management systems integrates leading non-financial risk management toolboxes in the market, which include:
- Climate scenario analysis
- Environmental stress testing
- Nonfinancial risk profile dashboard
ESG Reporting Assurance and Advisory
EY assists fund managers in complying with regulatory requirements, such as:
- Performing an independent review or assurance verification on the practices and controls as a fund manager pertinent to the revised SFC’s FMCC
- Recommend enhancement opportunities
Summary
Asset management firms should look at the inclusion of ESG factors and their alignment with key regulatory expectations as a critical immediate priority. This should be done in order to understand key areas for development and to focus on implementing a strategic plan in the long term, based on the priorities identified.
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