
Sustainable signals: Growth and opportunity in asset management
Morgan Stanley Institute for Sustainable Investing and Bloomberg L.P. report highlights how sustainable investing has transformed from a given fiduciary duty into a strategic business imperative in the financial markets. Asset managers in the U.S. perceive this shifting investment landscape as a new opportunity to create increasingly competitive returns and more productive portfolios in the coming years.
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OVERVIEW
Morgan Stanley Institute for Sustainable Investing and Bloomberg L.P. surveyed a total of 300 U.S. asset managers on the growth, direction and future outlook of sustainable investing. The survey found that sustainability is widely becoming integral to the investment landscape and there is recognition that clients are demanding an increasingly sophisticated range of investment approaches and outcomes.
Sustainable Investing Goes Mainstream
The survey identifies that the industry has matured to a point where environmental, social and governance (ESG) factors are being widely incorporated into investment processes. Furthermore, 89% of survey respondents believe that sustainable investment is not an anomaly but will be considered perpetually in evaluating future investments. Results of the survey also produced that 75% of respondents’ firms have established sustainable investing practices, and that 16% of the ‘non-adopters’ are in the planning to implement said investment protocols.
Financial Case for Sustainable Investing
Following on from the presence of sustainability becoming increasingly more significant in the industry, this has led businesses to approach these new practices as a strategic business-building opportunity. Moreover, while there might have been a point in time where integrating ESG principles into a business model might have been referred to as a ‘fiduciary duty’, it is now being adopted to achieve better monetary returns, particularly in the long-term. Even whilst 76% of those polled believe that a perception remains among some investors that sustainable investing requires a financial trade-off, 87% believe it is possible to achieve financial returns with ESG focus. Taking one step further, 62% agree that it is possible to maximise returns while investing sustainably.
Product Types Proliferate, Expanding Investor Choice
As more firms acknowledge sustainable investing strategies, they’re offering more ESG-tailored investment vehicles and expanding investor choice. The report finds that 62% of respondents’ firms offer mutual funds that consider ESG principles or integrate sustainability, followed by alternatives (55%), exchange traded funds (51%) and separately managed funds (45%). Additionally, 63% currently implement more than one sustainable investing strategy across ESG integration, thematic investing, impact investing, shareholder engagement and negative screening.
Expertise, Better Data and Impact Reporting Support Customisation and Drive Future Success
Respondents to the survey believe that growth in sustainable investing will be fueled by fading barriers to sustainable investing. Moreover, the evolution of sustainable investing will be shaped by increasingly sophisticated investors that demand products with demonstrated impact outcomes. To meet this need, asset management firms are building their capability to customise their approach and deliveries rather than offerings of standardised products (68% of polled asset managers believe this is an area of high growth). Better data is also critical to future growth and development. 72% of respondents felt that the industry lacks benchmark metrics which hinders the ability to quantify the non-financial performance and impact.
Overall, this survey reveals that asset managers view sustainable investing as a strategic business imperative. Asset managers forecast a positive outlook for both client demand and competitive returns, and will continue to build sustainable investing capabilities and product portfolios in the coming years.
KEY INSIGHTS
- 89% of survey respondents agree that sustainable investing is here to stay, an overwhelming improvement since 2016.
- A strong number (82%) of surveyed asset managers believe that ESG practices can lead to higher profitability, and ultimately that company with such practices may be better long-term investments.
- Compared with mainstream adopters, specialist firms were significantly more likely to utilise ESG integration, shareholder engagement and restriction screening strategies, perhaps reflecting a general application of ESG principles across all practices.
- There is no 'one-size-fits-all' approach to ESG integration. From the survey, the most common approach to integration was ESG leadership (43%), defined as investing in companies with superior ESG characteristics and/or performance. Another popular option was true integration (34%), in which ESG analysis is embedded into the broad investment decision process.
- Significant confusion remains around definitions of sustainable investing and approaches to measuring social and environmental impact. There is still no single set of metrics that has fully addressed the need for comparable, high-quality ESG data.
- Increasing acknowledgement of ESG policies and their affect on asset management can be recognised as a new area to target for employment. Firms should consider proactively training and developing this talent to stay ahead of the curve.
- Despite most asset managers recognising there is no tradeoff between sustainability and financial returns, they believe this view still hampers the growth of client interest and demand.
- The survey also suggests that the primary reason for implementing sustainable investment is to increase asset under management but the actual impact is to increase stability of returns and improve existing client satisfaction.
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