Embedding ESG across the investment approach

In recent years, the shift towards sustainable finance has markedly accelerated. Responsible investment, which considers the impact of ESG factors on risk-adjusted return and is aligned with investor values, has become key to the strategic agenda. In the wake of COVID-19, this trend will be further enhanced, not diminished.

• As a sign of its importance, more than 35 stock exchanges around the world have already issued (or are in the process of issuing) ESG reporting guidelines
• There are more than 3 400 open-end funds and exchange-traded funds globally that consider ESG factors in the way they invest. This does not include money market funds, feeder funds or funds of funds. Global inflows into such sustainable funds were up 72% in the second quarter of 2020 to USD 71.1 billion. Assets in sustainable funds hit a record high of USD 1.1 trillion as of the end of June, up 23% from the previous quarter [Morningstar Manager Research July 2020]
• Prior to COVID-19, the E of ESG was a powerful focus, as growing concerns about climate risk magnified interest in sustainability related investments that are seeking low carbon approaches and diversify away from fossil fuels. Many large financial institutions, private equity funds, hedge funds and institutional investors announced initiatives or funds geared towards sustainable assets and inclusive growth
  
• One of the effects of COVID-19 has been to also highlight the importance of communities and societal cohesion. We are likely to see a growing focus on social issues, including diversity and equality, as well as environmental ones with climate change remaining high on the agenda

The investment community will have a significant role to play in ensuring that corporates demonstrate long term value creation behaviours. Firms will need to bolster their purpose-driven investment portfolios and options for clients, while large investors must make good on promises made over the past few years to move towards more sustainable products and investments.

• Before the pandemic, about 25 percent of global assets under management were viewed through a sustainability lens. In the next few years, KPMG professionals expects that the proportion is likely to rise to 75 percent or more. This is a top-down strategic priority for many investors, business owners, regulators and tenants and it is not going away.
• Sustainable finance or ESG is a strategic issue that must be embraced across every aspect of firms’ business models, operations and communications. Consistency of definitions and data remain elusive, but regulation is spreading and we can expect a more uniform picture to emerge.
• It is not only a question of climate and carbon: COVID-19 highlighted that all business sectors are deeply interconnected across borders, and that societies of all types and wealth levels are vulnerable. Societal issues, non-discriminatory treatment of individuals, demonstrable commitment to equality, strong governance and clear values – all of these will be essential.
• The pandemic has already posed significant questions and challenges for one of the key segments of the asset management market – real estate. With uncertain valuations ahead for corporate real estate and retail assets in particular, the industry needs to find its recovery path into the new reality.
• In the ‘greening’ of their portfolios, some real estate owners are finding ways to make significant changes without spending significant capital. A holistic approach is needed, deploying more sustainable designs and material choices, modular and offsite construction methods, energy efficiency solutions, and other technologies.
• Real estate owners will need to deliver on their ESG promises and stakeholder expectations and find economic ways of doing it. They will need to engage in some new partnerships and collaborations in order to meet evolving tenant needs.
• Close to two-thirds (63 percent) said that their response to the pandemic has caused their focus to shift to the social component of their ESG program.

• Does your business have a clear strategic approach on ESG and documented principles? How is the firm integrating ESG more deeply into portfolios, processes, products and reporting?
• Transparency and effective communication is key – investors want more than financial reports. They want to understand the rationale behind their fund manager’s approach to ESG and view on how it affects risk-adjusted return and societal impact. Enhance your communications, supported by credible data and evidence points.
• Incorporate independent voices – with concerns circulating about ‘impact and/or green washing’, the involvement of independent advisors in designing your approach and providing assurance over ESG disclosures can bring comfort to investors.
• Establish ESG risk metrics and measure and manage these across all portfolios. Measure impact of portfolios as well. Impact metrics can be leveraged to drive better operational decisions that help achieve impact where it’s intended. Investors are increasingly asking about the ‘net’ positive and negative impacts associated with their investments, so you need to be able to provide a clear picture on this.