What’s next
Looking further ahead, asset and wealth managers will be expected to enhance their ESG strategy to include additional social and governance factors which cover the supply chains of their investments: Having oversight of downstream third-party service providers will help ensure sound operational resilience and stable business continuity.
Major issues faced by wealth and asset managers during the pandemic were fund liquidity risks and asset valuation difficulties. EY believes that going forward, both investors and regulators will demand enhanced climate risk and stress tests which include ESG factors related to liquidity and valuations in order to navigate through potential tail risk events and improve overall future resilience, and upcoming regulation is likely to require the disclosure of utilized models and scenarios.
With the application dates of the EU sustainable finance regulations approaching, wealth and asset managers need to prepare for regulatory compliance, and implement taxonomy and disclosure requirements.
New opportunities will arise for new categories of impact funds on further sustainable development goals, including social standards, health and wellbeing, or access to digital infrastructure. Government recovery plans provide opportunities for new ESG infrastructure investment.
Prior to COVID-19, ESG investing was often considered a compromise between returns and sustainable investing goals – you might not achieve one without compromising on the other. Now, we know that during a major global pandemic, ESG funds actually outperformed classic indices, and ESG factors emerged as major indicators of resilience in this crisis. The opportunity offered by this crisis is for asset managers to make the integration of ESG factors across their portfolios the “new normal,” because COVID-19 has shown that ESG investing is the key to sustainable, crisis-resilient long-term value creation. While the challenge may be big, the opportunity is greater – and it may not linger.
Summary
The COVID-19 pandemic showed that a company’s ability to circumnavigate economic and market disruptions is closely related to the degree of sustainability within said company. Wealth and asset managers are well advised to further integrate ESG factors within their investment due diligence process and to enhance their ESG strategy, methodology, and stress tests.