Are Managers and Investors on the Same Page When it Comes to ESG?

Plenty has been written about the rise of ESG investing, especially over the past two years, as the COVID-19 pandemic and a rise in consciousness about social justice issues have made investors more aware than ever of the social impact they can have on the world. The question that is often asked is whether this trend will last, or if it is merely a momentary fad.

Fund managers must decide how much of their efforts need to be put into ESG as they anticipate the evolving desires of social impact investors, but predicting the future can be difficult. Last month, JTC hosted a webinar featuring a panel of industry experts who discussed the rise of ESG and how funds can set themselves up to bring in the investors of the future.

Titled, “ESG Revolution in Private Funds: How to Attract the Next Generation of Investors,” the webinar was moderated by Wouter Plantenga, ICS Head of Group Client Services, and featured speakers including Paul J. Foley, Chair, Investment Management Practice, Akerman, LLP, who discussed the history of ESG and how we got where we are today.

As part of the webinar, survey questions were asked of the participants, a mix of fund managers, service providers, investors, and even those new to the industry. Their responses were very telling as we try to sort out where the industry is headed.

One question of note was: “How significant of a role do investors play in determining your ESG strategy?” 27% said a “very significant” role, while 47% said the investor role was “somewhat significant.” No one listed investors as “very” or even “somewhat insignificant.”

At first glance, these responses make sense. Most managers take their cues from investors, and are willing to explore ESG if it’s what investors want. And of course, if an investor doesn’t think their fund manager is taking their input, they aren’t likely to be clients for long.

However, the percentage that responded it was “very significant” (27%) was rather low considering how much discussion there is around ESG-related topics, especially since the start of the pandemic. In fact, other data suggests some investors don’t think managers are responding adequately to their desires for ESG offerings.

In a 2021 EY survey, investors were asked “Do you feel there are enough ESG offerings to meet your needs in the next two to three years?” Responses varied based on investment type, but the two sectors with the highest percentage of “No” responses (meaning they felt there were not enough ESG offerings) were Private Equity and Hedge Funds. These social impact investors are looking for more ESG investments, and don’t think enough are being offered.

Funds cater to investor demand, so if ESG is what clients want, they will surely follow suit. That said, they may be acting too slowly to catch up with firms in other parts of the world. In the same EY survey, when asked, “Do you offer ESG strategies to investors?” 67% of Asian and 66% of European managers answered in the affirmative. In North America? Just 28%. And when asked “Who has an ESG policy?” 92% of European managers did, compared to 64% in North America.

This doesn’t mean North American fund managers don’t care about social justice or the environment. Great strides have been made from years past, but the problem is that this growth isn’t swift enough to bridge what was already a significant gap.

Many European jurisdictions have regulatory frameworks for sustainability and impact reporting already in place, such as the Guernsey Green Fund Rules and the Sustainable Finance Disclosure Regulations, which force funds to be more proactive about ESG disclosures in ways North American funds aren’t obligated to be. It stands to reason that North American funds that take it upon themselves to go above and beyond in terms of ESG practices will have a leg up on other North American funds when it comes to attracting investors who are accustomed to the level of compliance reporting available in Europe.

In order to avoid losing out on capital, more firms need ESG practices and investment strategies. However, rushing head-first into ESG investing without proper due diligence can have disastrous consequences if those investments do not measure up when it comes to impact. Just as investors need proof of financial success, they also need accurate proof of success in impact.

In the webinar survey, participants were asked, “How important is ESG measurement to you?” 90% of those surveyed said it was “very” or “somewhat” important. That’s a pretty clear indication that social impact measurement matters to investors, fund managers, and even those only now entering the industry. They want proof a firm is walking the walk in its own practices and in the investments it selects.

JTC has been a leader in impact measurement and reporting, including pioneering industry best practices for evaluating impact across different kinds of investments. JTC was also the recipient of the top prize in the “Fund Administration: ESG” category at the 2021 Drawdown Awards. If fund managers are looking to improve practices at their firms or increase their ESG offerings, JTC can help.

The webinar contained further information from speakers Viktor Kats, Managing Partner at Augment Infrastructure, who looked at the issue from the fund manager’s perspective, and Bill Prew, Chief Executive Officer of INDOS Financial, a JTC Group Company. Anyone interested in the future of ESG can learn a lot from the insights provided by these experienced industry leaders.