Respondents of EY’s The rise of ESG investing survey indicate the largest market driver of environmental, social and governance (ESG) integration continues to be client demand — by institutional clients who want increased ESG integration as part of the investment process, as well as high-net-worth retail clients seeking expanded ESG propositions to include outcome-based products.
“Recent once-in-a-century social, political and economic issues have accentuated an already increasing investor focus on sustainable investments, making ESG a clear key strategic consideration for asset managers across Canada,” says Jean-François Gagnon, EY Canada Sustainable Finance Leader. “However, despite unanimous agreement on its importance, the extent to which firms have integrated ESG into their investment decision-making and product offerings varies greatly.”
The survey of 20 major Canadian asset management firms with collective assets under management of $2.5t finds that only half of respondents say they are fully integrated across all portfolio managers and investments, with 10% indicating they are still in the early phases of integration.
More than half of survey respondents list a lack of standardized data as the biggest challenge to ESG integration. This is followed by the absence of standardized taxonomies that organize and combine relevant elements of ESG data from different sources, and how they relate to derive impact scoring.
“Quality and standardization of data and taxonomies will play a key role in improving ESG integration in the coming years, but firms cannot overlook the importance of talent in this equation,” says Gagnon. “Recruiting is top of mind, but the scarcity of advanced expertise and experienced talent will escalate the importance of upskilling and knowledge platforms to fill the existing advisor knowledge gap as demand for ESG grows. On top of that, asset managers will need to determine whether their current operating model is conducive to ESG integration and fit-for-purpose against their evolving ambition.”
Even as demand grows, three-quarters of respondents expect it will take another two to five years before ESG is fully integrated into the investment process.
“While we’re still witnessing the early stages of its impact on capital markets, ESG represents a fundamental change to the traditional investment approach — both from a risk management and an alpha generation perspective,” says Gagnon. “As more clients start to demand the same level of transparency on their portfolio’s ESG impact as on its financial performance, asset managers who are able to deliver on both dimensions will gain a considerable competitive advantage.”
Find more insights from Canadian asset managers on ESG investing by downloading the EY The rise of ESG investing report here: www.ey.com/en_ca/financial-services/the-rise-of-esg-investing.