ESG, with its core values around sustainability, resiliency and stakeholder value, is a cornerstone of long-term value creation, but the two strategies differ in a significant way. ESG is focused on enhancing the company’s relationship with the world around it, creating a purpose that goes beyond making money. Long-term value embraces ESG’s principles but also acknowledges the need to generate profits and higher valuations — a notion that resonates with most FI leaders.
What has changed is the growing recognition that ESG-related factors, such as a company’s carbon footprint, commitment to diversity, community engagement and governance practices, can influence financial performance. FI leaders and investors understand this intuitively but need guidance in a fast-changing environment to make decisions that create opportunities for wealth and asset managers.
Increasingly, investors are looking to ESG as a foundational part of their asset-allocation strategies, with 88% of asset owners in Cerulli Associates’ 2020 ESG Report saying they place at least moderate importance on managers having ESG capabilities. The demand is highest among Gen Z and millennial clients.
Wealth and asset management firms are responding. In Europe, 94% of institutional investors reported adopting ESG practices, according to a 2020 survey by RBC Global Asset Management. In the US, 65% of institutions said they had embraced ESG principles.
Many more are adding language about ESG priorities and criteria to their investment policy statements. At least 200 new funds with ESG investment mandates are expected to launch during the next three years. As one asset manager puts it, ESG used to be viewed as a cost center with intangible benefits; today, it is seen as an engine for driving profits and market value. For FIs, ESG is no longer a niche; it’s becoming a strategic imperative.