ARX Series 23 March 2021
Future of Sustainability in Investment Management
Future of Sustainability in Investment ManagementWatch the Webinar
Investment firms increasingly view sustainable investing as critical for the sustainability of investing. The integration of sustainability in investment management is essential for the industry to improve long-term outcomes. This is primarily explained by the acceleration in investor demand for sustainable investment. But how do asset management firms adapt their business models to meet the expectations of investors, and what kind of impact will this have on hiring and retaining talent?
On 23 March 2021, CFA Institute Asia-Pacific Research Exchange (ARX) organised a webinar to explore key trends in the shift to sustainability in investment management and the kind of future it envisions. The webinar began with a presentation by Rhodri Pierce, CFA, sharing highlights from the Future of Finance report titled “Future of Sustainability in Investment Management.” The presentation was followed by a panel discussion, which was moderated by Mary Leung, CFA, and included Anubhuti Gupta, CFA (AXA), Chaoni Huang (BNP Paribas), and Charles Wu, CFA (SAS Trustee Corporation).
Sources of Disruption and Their Impact on Investment Management
Four key scenarios are accelerating the change in the investment management industry and where it is headed:
- Fintech Disruption: New technologies give rise to new business models. As a result, it will lead to disruption of existing models.
- Parallel World: Engagement in society differs by geography, generation, and social strata. This affects how people interact with financial services and their motivation and objectives for sustainable investment.
- Lower for Longer: Interest rates stay low, global growth disappoints, and political instability rises.
- Purposeful Capitalism: Investment industry becomes more professional, ethical, and client-centric. This provides financial firms an opportunity to respond to the responsible investment demand of asset owners.
To adapt to these disruptive scenarios, asset management firms need to make certain changes to their business, operating, people, investment, and distribution models. As asset management firms incorporate new data systems and new technologies, adjustments are made to their operating models. With regard to the people model, firms need to deal with implications around talent and skills to ensure they recruit and retain talent effectively.
Consideration of ESG Factors in Investment Strategy
The study conducted by CFA Institute found that a large number of asset management firms now consider environmental, social, and governance (ESG) factors in their investment strategies. Compared with 2017, the biggest advance was made in environmental factors, where the proportion of firms that incorporated environmental factors increased from 54% to 70%. Among Asia Pacific markets, respondents in Australia are more likely to take ESG into account than global average, and governance in particular. In Japan and Singapore, environment is a salient consideration. With regard to motivations, the major reasons to consider ESG issues in investment analysis and decisions are effective investment risk management (64%) and client demand (59%). In Asia Pacific, respondents in Australia and China cited risk management as the most important driver, whereas those in Singapore cited growing investor demand as a key reason.
With regard to sustainable investment approaches, the study notes that ESG integration is the most popular approach chosen by 57% of respondents, followed by best-in-class (56%) and negative screening (48%). The best-in-class approach also saw the biggest jump in adoption, from 38% to 56% over the past five years.
The Growth of Sustainable Investing in 2020
Sustainable investing has seen record growth in 2020 and the Asia-Pacific region saw net flows of $22 billion, according to Broadridge. One possible explanation for this growth was the belief that companies with a strong ESG profile usually are resilient at the time of crisis. Additionally, greening the environment also has been a central focus for a number of governments. For example, China made a commitment to achieve carbon neutrality by 2060. The COVID-19 pandemic has increased the focus on social issues, such as human capital and public health. Among various products, green bonds, thematic equities, and carbon strategies have become popular with investors. In 2020, the issuance of green, social, and sustainability bonds almost doubled relative to 2019. The nascent key performance indicator–linked sustainability bond is another potential area that could see significant growth in the field of debt issuance. Moreover, the launch of the US$2 billion Green Investments Program by the Monetary Authority of Singapore and the Sustainable and Green Exchange by HKEX are key developments in the Asia Pacific region that could accelerate the allocation of private capital into sustainable projects even further. As a result, many companies have made sustainability a key focus, not only to stay competitive but also to raise capital at a lower rate as well as diversify their investor base.
Sustainable Investing: A New Business Opportunity
Sustainable investing provides asset management firms with the opportunity to create more value and differentiate themselves from among their competitors. While there is a huge demand coming from asset owners and retail investors, there is also a regulatory thrust for more reporting and disclosures on how asset managers integrate material ESG factors into their processes. This is going to play a key role in shaping the business models of the firms. In terms of product development, the study notes that future growth opportunities include ESG index tracking and quant funds, ESG thematic products, ESG multi-asset products, climate transition strategies, and designing better benchmarks.
As for client motivations, institutional investors believe that ESG investing will result in higher risk-adjusted returns, whereas for retail investors, ESG investing provides them an opportunity to express personal values or invest in companies with positive impact on the society or environment.
The Rise of Alternative Data
Many investment firms seeking to achieve a competitive advantage on ESG recognise that technology is a necessary foundation. More than 71% of the respondents who participated in the roundtable discussions as part of the CFA Institute study believe that the rise of alternative data, generated by remote sensors, satellites, and financial transactions, will make sustainability analysis more robust. A lot of traditional ESG data comes from corporate reporting, which is backward looking and gives an incomplete picture of sustainability risks and opportunities. Moreover, sustainability data is often conceptual and subjective and would require human judgement to assess materiality and how such data can be integrated into investment decision making.
How Firms Employ ESG Analysts and Build Teams
Among the investment professionals surveyed by CFA Institute, about one-third had dedicated ESG analysts in their teams. The other one-third did not have a dedicated ESG team but considered ESG to be a skillset that should be embedded in the role of portfolio managers and analysts. The remaining one-third of firms did not have specialists either because they were too small to justify the cost, their strategies did not require it, or they outsourced much of this work. This suggests that there is no one-size-fit-all approach. For instance, for a firm employing a negative or exclusionary screening approach, ESG expertise may not be required, but for others building thematic strategies, it may be one of the key requirements.
Anubhuti Gupta, one of the panellists, noted that large investment management firms need to consider responsible investing not just from the perspective of an investor but also as employers. Her firm organises its ESG team in two parts: One part is the centralised team dedicated to ESG research based on data and quantitative analysis, and its resources can be accessed by all other teams in the firm. The other part is decentralised ESG experts who are part of investment teams and help build the investment strategy. The firm also focuses on democratising knowledge across internal platforms and organises trainings across different levels of expertise.
Chaoni Huang noted that a dedicated team is not sufficient to meet the overwhelming demand for ESG products. As a result, firms need to mainstream ESG across all their functions such that all employees, including relationship managers and traders, should be comfortable talking about ESG with clients.
As for asset owners, Charles Wu mentioned that the major focus of his firm is how they perform proxy voting. Active engagement and exercising shareholder rights is the most important aspect of their work. Such firms use the remaining time on building the right sustainable strategy — whether it be thematic investment or ESG integration. Furthermore, they also put a considerable focus on selecting portfolio managers and monitoring the performance of their ESG teams.
Recruitment Challenges and How an ESG Aspirant Can Start This Journey
One of the key challenges in the industry is the mismatch in supply and demand for sustainability talent. A CFA Institute review of more than 10,000 LinkedIn investment professional job posts found that approximately 6% mentioned sustainability-related skills, whereas an analysis of 1 million investment professionals found that less than 1% disclosed sustainability-related skills in their profile. This demonstrates the huge demand for professionals to increase their knowledge and capacity in the field of sustainability.
In the field of ESG, the sheer breadth of knowledge and the lack of standardisation are two major problems for companies to recruit the right talent. Additionally, because the ESG field is relatively nascent in nature, there is a shortage of relevant experience among applicants. One way asset management firms can address this issue is to examine the roles and responsibilities of the position and recruit based on these factors. For instance, if a firm is looking for an individual to integrate ESG in the investment process, a candidate with a strong investment background is preferred. As for domain expert roles, such as the sustainable use of biodiversity, an ideal candidate should understand quantitative and science-based targets that can assist the firm in finding the right investment approach. Another aspect is the use of alternative data in ESG products, for which firms may want to look for candidates with strong analytical and quantitative skills, while having some understanding of the ESG space.
An ESG aspirant should keep in mind that ESG is a large ecosystem in which everyone, depending on whether they are on the buy or sell side, has different perspectives. It is therefore important for aspirants to learn as much as they can about the roles they wish to target. Additionally, given the constantly evolving regulatory landscape, one needs to be aware of all the developments and understand how such developments can affect businesses in the region. As for client-facing roles, communication and other soft skills play a key role in navigating discussions to understand the actual needs of the client.
About the Author(s)
Mary is the Head, Advocacy, Asia Pacific at CFA Institute. She leads the team that is responsible for building market integrity in APAC by developing and advocating capital markets policy positions that raises investor protection and fosters sustainable industry growth. She also oversees the promotion and development of Asia-Pacific Research Exchange (ARX), a research hub through which we engage with societies, members, governments, regulators, academia and other industry stakeholders 6o advance the wider CFA Institute mission.
Mary has over 20 years of experience in the global financial industry, having worked in corporate finance, wealth management advisory, and fund management. She joined Coutts & Co, where she was director of Business Development and Management for North Asia. Prior to that she was executive director at UBS AG, where she led the Corporate Advisory Group in Hong Kong. With experience in both the buy- and sell-sides, Mary has a strong understanding of the drivers and dynamics of different investor groups, including institutional investors, corporates, family offices, asset owners, and high-net-worth individuals.
Mary graduated from Peterhouse, Cambridge with a degree in Engineering. She is a CFA charterholder and speaks English, Putonghua, and Cantonese.
Rhodri Preece is Head of Industry Research for CFA Institute. He is responsible for building and maintaining the global thought leadership function at CFA Institute, including leading the planning, coordination and creation of research content across CFA Institute research platforms including the Financial Analysts Journal, the Research Foundation, and the Future of Finance initiative.
Rhodri formerly served as head of capital markets policy EMEA at CFA Institute, where he was responsible for leading capital markets policy activities in the Europe, Middle East and Africa region, including content development and policy engagement.
Prior to joining CFA Institute, Mr. Preece was a manager at PricewaterhouseCoopers LLP where he specialized in investment funds.
Anubhuti Gupta, CFA, is the Head of AXA-IM Singapore and Head of Investment for APAC, Rosenberg Equities. She is responsible for the Asian investment strategies and client outcomes and is a member of the global Rosenberg Management Committee and Investment Committee. Prior to her current role, she served as the Head of Portfolio Management, Director and Deputy Chief Investment Officer for the region since 2015 and initially joined AXA IM in 2005 as a Portfolio Manager. Anubhuti was an intern with a Singapore-based hedge fund before joining AXA IM. Anubhuti holds a MSc in Financial Engineering from the NTU Graduate School of Business and a BEng from Nanyang Technological University (NTU) in Singapore. She also has a certificate in Computational Finance from Carnegie Mellon University Tepper School of Business. She is a holder of the Chartered Financial Analyst, Chartered Alternative Investment Analyst, and Certificate in Investment Performance Measurement designations.
She is a member of the CFA Institute Education Advisory Committee (2015 – Present), Executive Committee (2016 – 2019) & Advisory Board (2019 – Present) of Singapore Chapter of CAIA Institute and the Nominating Committee for CFA Institute Board of Governors (2020 – Present)
As Head of Sustainable Capital Markets for Global Markets Asia Pacific, Chaoni leads BNP Paribas' sustainable finance solutions for corporate, financial institutions and investors with a focus on primary asset finance and securitisation Working with Global Markets in Asia Pacific and the Bank's global sustainable finance community, Chaoni drives BNP Paribas' continued expansion and leadership in Asian sustainable debt capital markets.
Chaoni is an industry veteran with over 13 years of experience in sustainable finance having held various ESG related roles at Natixis, S&P Trucost MSCI and the United Nations In addition to her role at BNP Paribas, Chaoni is also deeply embedded in the sustainable finance industry, where she is Vice President and Secretary General of the Hong Kong Green Finance Association and a guest researcher at both the Green Finance Center at Tsinghua University and the China Economy and Sustainable Development Centre at the Cheung Kong Graduate School of Business.
Chaoni received her Bachelor of Economics from the University of Warwick.
Mr Wu was appointed CIO in December 2020 and leads State Super's internal Investment team. He is responsible for determining and executing the Fund's investment policies and objectives, determining asset allocation, and implementing and monitoring the Fund's investment arrangements. Mr Wu is acknowledged across the industry for his expertise in the use of machine learning (artificial intelligence) within pension funds and has helped bring State Super to the forefront of this exciting development. Mr Wu joined State Super in 2015 and was previously an Investment Manager at Media Super and an analyst at Mercer. He holds a Master of Commerce and a Bachelor of Computer Engineering and is a Chartered Financial Analyst holder. In 2020 he was appointed President at Chartered Financial Analyst (CFA) Society Sydney.