Strategy & Practice Management

Sustainability in investment management at a pivotal juncture; demand will drive growth if industry adapts, new CFA Institute report shows

CFA Institute, the global association of investment professionals, has released a new global research study that examines the state of sustainable investing and how this trend – accelerated by the Covid-19 pandemic – will shape the investment industry over the next decade.

Among the findings, 85% of CFA Institute members surveyed now say that they take E, S and/or G factors into account when investing, up from 73% just three years ago. This growth has been driven by client demand, with 69% of retail investors and 76% of institutional investors having interest in ESG investing, CFA Institute said in a press release.

The report, The Future of Sustainability in Investment Management: From Ideas to Reality, explores the influences driving the sustainability trend and sets out implications for investment firms, including the need to better integrate sustainability data and to develop sustainability expertise to meet client expectations with innovative products. The research includes perspectives from over 7,000 industry participants, including investment clients, investment practitioners, ESG specialists, and more.

Although the future of sustainable investing includes many unknowns, the report advances three important tenets where sustainable investing goes further than its forerunners:

  • It is additive to investment theory and does not mean a rejection of foundational concepts.
  • It develops deeper insights about how value will be created going forward using environmental, social, and governance (ESG) considerations.
  • It considers many stakeholders.

The report concludes with actions that investment firms and professionals can take to advance the transition toward sustainability in investment management.

Margaret Franklin, CFA, President and CEO, CFA Institute, said: “Incorporating sustainability in investment management has become part of our industry’s mission to serve society by improving long-term outcomes. This moment represents a valuable opportunity for organizations to address this challenge and help shape a future worth investing in. As the focus on sustainability in investing gathers increasing momentum, it will eventually dictate the sustainability of investing itself.”

In addition to these findings, the report focuses on four key areas of sustainable investing:

  • The rise of alternative data and its importance in sustainability analysis: Technology is a necessary foundation for competitive advantage in ESG analysis, with more data sources becoming available and more differentiation among data. 71% of roundtable participants believed that the rise of alternative data will make sustainability analysis more robust, while 62% agreed that sustainability is an area where human judgement and active management will thrive, highlighting the often subjective and contextual nature of sustainability data.
  • Increased demand for sustainable investing expertise: There is a relative scarcity of sustainability talent in the investment industry. CFA Institute used LinkedIn Talent Insights and found that the supply of expertise among core investment roles is limited but growing quickly. Of the 1 million LinkedIn investment professional profiles examined, less than 8,000 list ESG as an area of expertise. However, CFA Institute found that this figure has increased 26% in the last year. Meanwhile, a review of 1,000+ portfolio manager job posts on LinkedIn found that approximately 18% mentioned the desire for sustainability-related skills.
  • Investor demand is driving firms to change their investment models and expand product offerings: Among the various ways to incorporate ESG into the investment process, ESG integration and best-in-class approaches are more popular than negative or exclusionary screening, highlighting the evolution of ESG techniques, enabled by improvements in data. Future growth opportunities in the product space include ESG index tracking and quant funds, ESG thematic products, ESG multi-asset products, climate transition strategies, long-term engagement, and better benchmarks.
  • The relevance of systems thinking in sustainability analysis: The Covid-19 pandemic has emphasized the urgency of sustainability issues, highlighted the interconnectedness of the financial system, and how corporate value creation both affects, and is affected by, the ecosystem in which it operates. The integration of sustainability issues will require a more widespread application of system-level thinking.

Mary Leung, Head of Advocacy, Asia Pacific, CFA Institute, said: “75% of the respondents in APAC said there is a need for improved standards around ESG products to prevent 'greenwashing'. We believe the investment management industry is now ready to change from within by moving towards a purpose-led culture and acting in a way that will produce more sustainable and beneficial outcomes for all stakeholders.”

In Asia Pacific, although only 26% of respondents said their organizations have dedicated ESG analysts, close to half of them (49%) feel optimistic about their firms’ future commitment to the research of ESG and sustainability issues to be significantly higher in the next five to 10 years.

In Hong Kong, retail investors who are interested in ESG investing have increased 15%age point from 2018, to 86%. For firms considering ESG in their investment analysis and decisions, client and investor demand is the biggest factor, followed by a proven link between ESG and financial performance and regulatory/legal requirements. This upward trend has inspired 79% of respondents to consider pursuing further training on ESG analysis.