ESG: sustainability balance sheet and assets at global level

The sustainable balance sheet is extremely important for asset managers as it enables them to integrate sustainability into investment decisions and asset management. A sustainable balance sheet helps mitigate risks, improve financial performance, comply with regulations, engage investors and contribute to overall sustainability. Integrating ESG considerations into asset management is not only an opportunity to create long-term value, but also to promote a sustainable and responsible economy.

The latest Sustainable Signals survey by the Morgan Stanley Institute for Sustainable Investing shows that the market for sustainable investing is growing by region. Institutional investors continue to support sustainable investments as demand has increased by 77 per cent over the past two years. The EMEA (short for Europe, Middle East, and Africa) region is currently outperforming other geographic regions, but the APAC region looks set to grow the most in the next two years. The report presents the results of a quantitative online survey conducted by Coalition Greenwich on behalf of the Morgan Stanley Institute for Sustainable Investing. Between April and May 2022, 201 asset owners in North America, Europe and Asia Pacific and 110 asset managers in the same regions were surveyed. Asset owners included insurers, pension funds, financial institutions, foundations and endowments.

The survey suggests that asset managers can adopt sustainable investment practices, which are considered a priority by the majority of asset owners, evidenced by a 49 percentage point gap in desired ESG reporting and disclosure practices. In addition, asset managers can design new investment products to meet the growing demand of asset owners on a range of sustainability issues. Finally, asset managers can provide access to more ESG metrics commonly sought after by asset owners, as the survey shows with 29 percentage points in climate risk stress testing data and 22 percentage points in climate risk scenario analysis data.

Both standardised ESG products and customised portfolios are set to grow, albeit differently from region to region. Managers and asset owners have the opportunity to set targets according to clients' needs. Institutional investors are looking for better data to measure environmental and social impact, and they face a shortage of talent. The Sustainable Signals survey found that 85 per cent of asset managers and 83 per cent of asset owners already implement or plan to implement in all or part of their portfolios.

Finance has a growing role in facilitating the energy transition to a zero-emission world. All institutional investors employ a broad spectrum of sustainable investment approaches in their portfolios with greater integration of ESG products. The only exception is the asset managers in EMEA, where 86% of respondents implement exclusion, negative and restriction screening based on values. Among asset classes, public equities remain dominant, adopted by 66% of asset managers and 64% of asset owners.

Almost eight out of ten institutional investors reported an interest in sustainable investments by May 2020. APAC asset owners saw the most interest (92%), closely followed by EMEA asset managers (86%), EMEA asset owners (82%) and APAC asset managers (82%). When asked what was driving growth, global asset managers mainly cited a combination of client demand and investor pressure, while global asset owners cited public opinion. However, regional dynamics differed with regulatory developments being a critical factor in the EMEA area and market performance for asset owners in the APAC.

The survey found that European asset management companies are outperforming those in North America and Asia Pacific in terms of integrating sustainable investment policies and practices within their companies. However, the findings also suggest that Apac institutional investors, particularly asset managers, have expressed greater interest in increasing their share of the sustainable investing market over the next 24 months. APAC managers lead the way in terms of plans to expand sustainable investment products, with particular interest in hedge funds (36%), private debt (33%) and real assets (31%). Expansion also for sustainable investment approaches, including shareholder engagement (45%), ESG integration (32%), restriction screening (32%) and thematic investments (23%).

The survey highlighted several areas where asset managers have an opportunity to meet the interest in sustainable investments and the demand of asset owners. These opportunities provide insights into how asset managers can better differentiate themselves in this maturing market. Asset managers have the opportunity to better adopt and articulate their sustainable investment practices to meet the demands of current and potential clients. Asset owners prioritise third-party managers in their evaluation and selection across investment measures. The largest gap (49 percentage points) concerns the disclosure of ESG information. Only 39 per cent of asset managers report ESG performance alongside financial performance, despite the fact that 88 per cent of asset owners say they seek out third-party managers with such practices.

Asset owners want more transparency from companies managing their assets on ESG issues ranging from climate change to governance (board structure and proxy voting). For example, half of asset owners want data on climate risk, but less than a third of asset managers provide these metrics to clients, despite the topic being one of the key points of the Task Force on Climate-Related Financial Disclosure.

Asset managers can differentiate their businesses and lay the foundations to gain share in a growth market by increasing assets under management. At the same time, challenges to growth persist. Eight out of ten asset owners revealed that they lack the necessary data to adequately measure their environmental and social impact, and that they face a talent drain of sustainable investment specialists.Among the specific sustainable investment instruments, offsets, carbon allowances and emission quotas, are experiencing growing investor interest. In fact, almost a third of asset managers and owners (32%) plan to invest in this area in the next 24 months.

There was interest from asset owners in requiring external investment managers to have a target or strategy of zero net greenhouse gas emissions within the next two years. Although institutional investors embrace sustainable investing and cite growing interest, the survey found that the majority (64% of asset managers and 70% of asset owners) still do not have a net zero greenhouse gas emissions target. The survey shows that there is an urgent need to fill data gaps on ESG impact and to develop the sustainable investment industry. Overall, these actions can help to increase the credibility and adoption of sustainable investment strategies among institutional investors worldwide. In this perspective, 3Bee can provide valuable input to SMEs as a biodiversity partner providing innovative and transparent solutions.