‘Once-in-a-century’ pressures leading to greater ESG demand: EY

The demand for environmental, social and governance (ESG) investing continues to grow, specifically among institutional and ultra-wealthy clients, but the efforts of asset managers are still lagging.

So finds a new survey by EY, based on interviews with “key contributors responsible for ESG strategies” at 20 large asset managers from across the globe, including in Canada. Participating firms had collective assets under management of more than $2.5 trillion.

Even with 2020 being “nothing short of a watershed year,” the report said, and with record flows going into ESG mutual funds in 2018, 2019 and 2020, asset managers aren’t being proactive enough.

The main issues, the report noted, is most firms have been “reactive to the market,” with only 50% of respondents saying ESG processes have been fully integrated into investment decision-making. So far, “The majority of respondents anticipate developing more outcome-based products in the future, but their immediate focus is on integration,” it said.

In a breakdown, the report indicated that the majority of respondents (75%) are two to five years away from full ESG integration, while 15% have already achieved that goal. A small group (10%) are 10 or more years away from total integration.

On the positive side, “None of the asset managers we spoke with saw ESG products either returning to or remaining on the margins, as investor demand and regulations are expected to continue to drive growth,” the report said.

The persistent hurdle listed was lack of strong ESG data. Common feedback was that data and disclosure tend to “be limited for some asset classes and may lack granularity in some areas,” leading to third-party data not being reliable and variance in ESG scores from different sources.

Other issues that popped up were ESG meaning different things across industry organizations, small talent pools of ESG experts, and “continuously expanding reporting requirements, which makes it hard for less-equipped asset managers to keep up,” the report said.

But firms can’t be passive.

“Recent once-in-a-century social, political and economic issues have accentuated an already increasing investor focus on sustainable investments, making ESG a clear key strategic consideration for asset managers across Canada,” said Jean-François Gagnon, EY Canada sustainable finance leader, in a release.

He further suggested that firms should recruit talent as data improves.

“The scarcity of advanced expertise and experienced talent will escalate the importance of upskilling and knowledge platforms to fill the existing advisor knowledge gap as demand for ESG grows,” he said.

Addressing the knowledge gap of investors is also paramount, the report said, given most asset managers surveyed said they “don’t expect clients will be willing to sacrifice return in exchange for impact” — though retail clients were perceived as more willing to do so, it added.

Whether that’s the case is up for debate, if you consider the findings of a new survey of 2,860 Canadians that was commissioned by Desjardins Group in November and December. Specifically, that survey found 28% of respondents on average believed that responsible investments (RI) deliver lower returns. Regionally, the percentage was highest in Alberta and B.C. (33%), compared with 30% in Ontario and 22% in Quebec.

The vast majority of Canadians in that survey who were interested in RI products (75%) chose them to help the planet rather than for return potential (54%). Nearly two-thirds (61%) of those unlikely to use such products would do so for better returns, the Desjardins release said.

Despite data that show otherwise from groups such as the Responsible Investment Association, “Clearly, the myth that responsible investments are less profitable persists, despite actual results,” said Marie-Justine Labelle, head of responsible investment at Desjardins Investments Inc., in the release.

A separate study from Mackenzie Investments — based on a sample of 1,504 adult Canadians who were polled in March 2021 — noted the pandemic has shifted people’s views. In that poll, the majority of respondents (55%) said they’re now more likely to consider how their investments impact society, in relation to the environment, human rights and diversity.

Only one-third of respondents said they invest sustainably today, the Mackenzie release said, but one-third of those who don’t hold RI products plan on adding them in the years to come.