Environmental, social, and governance (ESG) concerns have intensified in the recent past and the growing regulatory and policy frameworks indicate sustainability is becoming a mandatory undertaking for companies. All about ESG asset management just below.
In the capital markets, the new policies require every listed firm to produce sustainability reports for stakeholders to read and make the right investment decisions. For asset, wealth, and financial management firms, focusing on sustainability requires using the best sustainable practices to optimize positive ESG impacts in the targeted areas.
Asset managers target achieving high levels of sustainability and complying with different new policies or policies, but it is never easy. Most of them find sticking to the areas of risk that each investor in their portfolio wants and corporate ESG reporting challenging.
This brings us to the big question, “how can asset management firms optimize their ESG benefits?” Keep reading to learn more about ESG asset management and the approaches they should use for better results.
Think Broadly about the Definition of ESG in Asset Management
Since the 2016’s Paris Agreement, many are people who hold the view that ESG sustainable services or compliance are only about cutting down greenhouse gasses (GHG).
Others even believe that only large finance providers or businesses with global operations should focus on sustainability. However, it means way more than that. Sustainable asset management firms should explore this definition broadly to identify more areas of action and take advantage of them.
Here are the three main pillars that a business or finance management firm committed to sustainable operations should consider. Note that the focus touches on all areas, from selecting the portfolios, securities, and market of interest.
- Environmental: This pillar of ESG includes things like carbon emission, renewable energy, waste management, and green building design. The investment portfolio or funds of interest should target areas with no or little impact on the environment.
- Social: The social pillar of your company includes equity, inclusion, and diversity. Social opportunities and labor standards in supply chains also fall into this category. Most clients on the market want to see strategies that can help to improve their social well-being. For example, a private investment fund management might want to check a targeted business’s services or products to not only see its impact on the climate but compliance with local laws on promoting social equity.
- Governance: In the governance consideration, you should look at things such as executive pay and diversity. Corporate behavior, such as tax transparency and business ethics, are also part of governance in sustainability management. Make sure to dig deeper into the operations data to see how wealth is distributed.
We must say that when looking at these pillars in financial services management, you need to appreciate that they are interconnected.
For example, governance is very important because it determines the process of resource allocation and relationship with clients, among other stakeholders. So, even if a targeted company is doing well in a specific area, staff and products released into the market should be factored in.
Simply put, only securities of firms committed to addressing every associated risk and making the planet a better place for all should be considered.
ESG reporting benchmarks allow companies to compare their performance with industry peers and best practices.
Craft a Reliable Strategy for ESG Asset Management
Like other companies, asset management firms have a wide range of opportunities to influence outcomes via local and global ESG strategies. Therefore, taking a general approach or not having a clear strategy is likely to result in sub-optimal performance of the capital management firm.
As an asset manager, it is prudent to appreciate that the goal should be guided by stakeholders’ or investors’ preferences on specific risks or areas, such as climate impact through their funds. So, here are some useful tips for crafting a good investing strategy or solution:
- Carry out ESG audits to identify key opportunities and risks for your organization.
This is paramount because it helps map what areas the financial or capital management business should target. If it has been in operation for some time, this is an excellent moment to enhance the portfolio management firm’s efforts for addressing different risks.
- Work with stakeholders, especially investors, to know what they prefer.
This is very important because investors might be interested in making a positive impact only on a specific area, such as ecological diversity and waste management. You need to be as candid as possible to ensure that each investor feels his/her funds will be directed to the right area. Managers should strive to win as much trust as possible from the clients.
- Carry out a materiality assessment to narrow down to specific topics for action.
This means identifying the areas of action that will deliver the greatest positive effects for your company. You might need to work closely with the investors if the areas of focus are too diverse. The importance of materiality assessment is that it helps to push the impacts of every investor or fund management to the next level, making them enjoy their work more.
We must say that having some skills in data management for sustainability is particularly crucial for managers of mutual funds and other financial providers when picking the reporting topics.
Also, every capital market out there keeps insisting that the solutions selected by fund managers or financial managers must be in line with clients’ preferences. To grow this trust in the investing landscape, it is crucial to use solutions that make clients easily follow the adopted strategies and results along the way.
- Develop specific ESG goals of interest and how to achieve them.
To achieve any sustainable goal in any private wealth management process, it is crucial to have a clear goal and work towards a well-defined plan. The goal should provide investors with assurance that their resources will deliver the expected impacts. You might want to provide regular updates about the progress to win their confidence.
Remember that the goals should be developed carefully, factoring in all regulatory needs for the securities markets and institutional operations. Again, the manager should feel at liberty to help every investing client with more information if the target securities will result in eroding genuine gains for sustainability.
For example, if a selected institutional finance product or company of interest has started engaging in malpractices, you should not continue with it because the impact will be negative.
- Generate and publish ESG asset management reports.
At the end of the financial year, call it a reporting phase, every client or investor in your portfolio will be waiting to see whether he/she contributed to the solutions improving the planet. Using the data gathered along the way, including at the materiality assessment phase, you should generate a comprehensive report for the client to read. Make sure the report links the objectives of the mutual fund to demonstrate how they were achieved.
The report should also provide a plan for the next reporting phase.
The good thing about private investment clients is that they are very consistent. When they see and are impressed with the compliance and positive impacts of their finances, they will want to achieve a bigger goal. For example, an institutional retirement fund manager might recommend selecting companies that are helping the planet move faster toward zero-carbon status.
Customize Assets Based on Their Classes
The parameters you measure, resources employed, and reporting in asset management vary depending on the industry subsectors. Because each sub-sector has varying structural issues, the best practice is clustering them. This can help you to optimize the results of the retirement funds management impact and appeal to different investors.
Mutual funds come with a wide array of opportunities, and the products of interest target investments that focus on human rights, gender diversity, and responsible corporate culture. However, alternative investments diffuse several ESG opportunities, with the main focus being how sustainability principles are handled.
Therefore, alternative investment providers might only check the ESG rating to approve an investment.
Investors in real assets often target the environmental and regulatory factors of ESG. For example, properties that are LEED-certified attract more investors compared to those that do not.
Other aspects of interest will include waste management and support for conservation.
Develop a Clear Plan for Data Management
ESG asset management puts a lot of emphasis on giving accurate and verifiable information to stakeholders. This means that you need to have a clear plan for managing data.
You should start gathering data and focus on regulatory compliance immediately after deciding to adopt ESG operations in asset management and continue until the ESG report is made to stakeholders.
One crucial component that can help you with institutional or company data management is using appropriate ESG software. The app allows you to create a goal and follow a clear path to achieving it. It also makes it possible to use appropriate ESG frameworks, such as the Global Reporting Initiative (GRI), for greater credibility and better rating.
These are some of the most important considerations that investment managers should consider for better ESG asset management. Make sure to also factor in tax implications for the selected assets and take advantage of every ESG-related opportunity. Contact us for expert assistance and the best ESG asset management programs.