ESG Affirmations and Surprises: Asset Managers Look to the Future

The progression of ESG investing in the global asset management community continues to be a source of fascination and a lightning rod for conversation, engagement, and innovation. As the “Index Industry Association 2023 ESG Survey” demonstrates, ESG considerations are transforming how asset managers approach their jobs and serve their clients.

The first IIA ESG Global Asset Manager Survey in 2021 helped confirm that ESG considerations are here to stay. Of the 300 asset managers queried, 85% expected such criteria to play a greater role in portfolio construction and management in the coming decade. I outlined the key expected drivers of this growth in “ESG: Full Speed Ahead, with GPS” and unpacked the growth prospects in more detail with insights from the second IIA ESG survey in 2022, honing in on how ESG implementation had expanded beyond equities and into fixed income.

Fast forward to 2023 and the IIA’s third annual ESG survey of global asset managers reveals even more affirmations of ESG criteria — along with quite a few surprises.

On one level, the latest global ESG survey emphasizes the global asset management community’s strong commitment to ESG strategies even in the face of economic volatility and political and geopolitical friction. On another level, the survey illuminates how the community has embraced innovation in instituting ESG strategies on behalf of its clients.

Environmental Factors That Are Most Important to Companies’ ESG Strategies, 2023

Base: Respondents who implement ESG criteria in their portfolios: US (n72), UK (n76), France (n58), Germany (n66)

Indeed, asset managers are thinking more broadly and creatively around ESG factors, according to the survey. From an environmental standpoint, while climate is still king — 75% of asset managers prioritize the “E” over the “S” and the “G” — the scope of climate-related topics that concern asset managers has widened. For the first time, carbon emissions are no longer the top priority.

At the same time, social as well as governance factors are much more top-of-mind. Yet, while global asset managers understand the need to keep sharpening their focus on ESG-related investment issues and expanding the depth and breadth of their analysis, they also know they need better data and metrics. Over half (54%) of the asset managers surveyed say that evaluating the social and governance performance of companies is a challenge and 56% say that keeping up with changing societal views and related expectations around ESG issues is difficult.

Technologies That Asset Managers Expect to Have the Biggest Impact on ESG Measurement and Reporting over the Next Two Years, 2023

Base: All respondents (n300)

Global asset managers are also thinking more creatively about ESG implementation and further reframing the asset class discussion. Though ESG implementation’s continued expansion into fixed income was expected given previous trends, the rapid rise of ESG criteria in commodities was more surprising. Just 37% of survey respondents said they applied ESG consideration to the asset class in 2021. This year, 62% said they did.

But that is not the 2023 survey’s biggest revelation. To my mind, the key takeaway is the role asset managers expect emerging technologies to play in expanding and improving ESG metrics, data, and analysis. Asset managers are well aware of the current challenges. A lack of data standardization across markets, insufficient quantitative data, and a dearth of agreed-upon ratings and methods are nothing new. But survey respondents believe big data analytics, cloud computing, and other technologies will help address these deficits and improve the quality, scope, and content of ESG data and metrics. In fact, of the asset managers surveyed, 48% expect artificial intelligence (AI) and machine learning will have the most influence on ESG measurement and reporting over the next two years.

Asset managers acknowledge how difficult and uncertain ESG implementation is today. But they see vast technologically driven improvements on the horizon, which suggests that ESG integration is still in its early stages, with much more to come.

This is the seventh installment of a series from the Index Industry Association (IIA). The IIA celebrated its 10th anniversary in 2022. For more information, visit the IIA website.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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