How Southeast Asia’s asset managers can be leaders in sustainability

Standing out from the crowd will require an uplift in data quality, ESG capability and credibility.

In brief

• Asset managers need to respond to rapidly growing investor expectations of integrating ESG into investment decision-making.
• But ESG adoption is uneven across the region’s asset managers, with the majority being fast followers, rather than leaders.
• Better ESG data, certification and assurance will help firms to differentiate themselves in the increasingly crowded sustainable investment market.

Environmental, Social and Governance (ESG) is fast becoming mainstream among financial market participants amid the push for greater ESG integration by regulators and investors, and the wider appreciation of responsible investing across Southeast Asia. As demand continues to rise, asset managers need to shift their business-as-usual strategies to put ESG considerations at the heart of investment decisions.

For asset managers, having the products, services, capabilities and cultures to serve investor appetites for ESG investing is emerging as a pathway to growth. But adoption is uneven. While some have embraced innovation, other feel paralyzed by the idea of transforming.

At the EY Asean Sustainability Summit 2022, the majority of asset managers self-identified as fast followers – with only a few believing they were leaders or laggards. But all had ambitions to become leaders within a few years. Making this transition will require asset managers to improve across five ESG-related areas:

1. Governance and strategy: establishing dedicated board Sustainability Committees, clear ESG roles and responsibilities, and defined KPIs for management
   
2. Research and portfolio construction: setting clear expectations for investee companies and integrating ESG with investment decision-making and assessment
3. Portfolio risk management: performing qualitative and quantitative scenario analysis, and identifying quantitative risk appetite
4. Stewardship: actively engaging with investee companies to assist with their ESG transition, including encouraging them to drive value-led sustainability, by creating and protecting value for society, the planet and their business
5. Disclosure: announcing long-term targets, reporting ESG annually, regularly updating stakeholders with bite-sized information on their webpage or microsite and using third-party assurance to underpin confidence in their reporting

But many obstacles are hampering efforts to improve on these fronts. To make the shift to become leaders, Southeast Asia’s asset managers will need to take several actions.

Improve ESG data quality

The latest EY Global Institutional Investor Survey, which polled 62 of the world’s largest asset managers, shows a disconnect between the ESG data asset managers need and what’s available to them.

When it comes to investment decision-making, asset managers face structural obstacles to using nonfinancial information because much of it is presented in either narrative or unstructured form. As a result, many asset management firms are still struggling to develop and maintain a single source of the truth.

Nonfinancial disclosures are not yet sufficiently accurate, consistent, appropriate or timely enough for asset managers to use them as often or as effectively as they would like. And, although there is a multitude of market data providers and specialized ESG ratings companies, the majority of these only offer a partial solution.

At the same time, differing legal systems, as well as varying social and political contexts, influence the principles that determine standards and regulations governing sustainability information. Not surprisingly, different jurisdictions are moving at different speeds and in different ways to develop and implement ESG reporting rules.

To better suit the needs of investors looking for useful ESG data, those within the sustainability information ecosystem must build trust and improve collaboration. Until they do, it’s not unusual for large asset managers to use various ESG data providers, brokers and academic research feeds to try to fill the ESG data gap. Our analysis shows that, around the world, most asset managers use between two and five different providers – and some even use up to 10 different third-party vendors.

Find new sources of ESG capabilities

Amid an asset management battle for talent in responsible investing, ESG experts are in high demand. Some asset managers are being prevented from moving forward in green finance due to a lack of ESG expertise and the difficulties of retaining such talent in a tight skills market.

Getting people on board isn’t just about offering a higher salary than the next employer. People that are passionate and purpose-led in sustainable finance don’t want to go into an environment where people may be cynical about ESG or won’t listen to new ideas. Asset managers with a culture that strongly supports ESG strategies will be more likely to win in the war for talent. 

Those struggling to attract the right candidates should also consider upskilling internal talent, outsourcing the expertise or using consultants to support skills transfer.

Identify individuals to take ownership of ESG integration

Asset managers need to devote adequate resources and assign ownership to drive net zero. It’s vital to identify who will be accountable and responsible for ESG strategy rollout and integration across the business.

It’s also important to ensure all teams in the organization understand their role in driving the ESG agenda and how they individually and collectively contribute to this. Eventually, the goal is to create a culture where all employees live and breathe sustainability, with increased transparency across the organization to enable end-to-end reporting on ESG initiatives.

Understand and meet stakeholder expectations

Investors are increasingly looking for tangible proof that the companies they invest in are supporting their own ESG stewardship requirements – and are often frustrated by the disconnect between sustainability and business strategies and between ESG and mainstream financial reporting. They want ESG disclosures that demonstrate the impact of sustainability issues on enterprise value, and which describe how material sustainability issues are managed through appropriate governance structures, risk frameworks, reviews and controls. 

Importantly, investors need consistent and comparable disclosures about asset managers’ ESG strategies so they can understand what data underlies funds’ claims and choose the right investments for them.

While a universal standard does not yet exist, ESG reporting guidelines are available in the form of various internationally and regional reporting frameworks, voluntary standards and national legislation. Asset managers must understand which frameworks their stakeholders value: TCFD, the EU’s SFDR regulation or the ICG’s master reporting.