Asset managers struggling to create an appealing ESG strategy: Bain and Co

Asset and wealth managers are struggling to carve out an ESG strategy that will appeal to investors, as these investors are increasingly questioning the claims of these sustainability commitments, according to Bain and Co.

Investors are concerned that their fund and wealth managers are only talking the talk with ESG-compliant assets and aren’t following through with their promises.

Stefan Woerner and Matthias Memminger at Bain and Co said, “The ambition to stake out ESG-friendly territory may have even led some well-intentioned companies to overstate their actual commitments, Bain analysis shows, or at least push the boundaries of what investments could be considered sustainable.

“At the same time, the number of business press articles on greenwashing—conveying a misleading impression about how an asset is environmentally sound—has soared at a 147 percent compound annual growth rate over the past three years.”

Marketing efforts may miss the essence of sustainable finance, which boils down to acting with intention and measuring the effect of those actions, the authors note.

“This situation stems in part from the lack of common reporting and audit standards—there is simply too much room for interpretation of “sustainable” investments. Elusive regulations and standards don’t help either,” the authors said.

“A portfolio manager could do every possible thing to focus on ESG and still be told that not enough has been done—or that what has been done doesn’t satisfy important stakeholders.”

According to Bain and Co, by 2030 the measurable impact of investment on ESG factors will have the same notoriety as financial return and risk level.

“Clients deserve solid information on progress in the ESG component in question, such as reduction of carbon emissions or water usage, enhancement of employee diversity, or transparency of governance,” the authors said.

Fund managers can’t ignore this push for information because the demand for ESG-related assets will only continue to expand as evidence accumulates of superior financial performance.

Public companies with top ESG ratings, for example, tend to show higher than average multiples, suggesting the imbalanced demand/supply for ESG assets, said Woerner and Memminger.

“However, the growth of ESG-linked investments is running into limitations because of a dearth of standard metrics and the opaque methods used to derive ratings,” they said.  

“There are no global standards in ESG reporting, so ratings remain inconsistent, with the number of ESG factors used to derive them ranging from about 40 to 280, depending on the sponsor of the data set.”

Established ESG ratings seldom allow for customisable evaluations at scale and hardly support thematic strategies, thus many companies have developed their own mythologies.