ESG Survey 2024 - Sustainable investment: time to converge

In 2021, Societe Generale Securities Services (SGSS) carried out a survey of key European asset management players, revealing a rapid transformation of investment models and operational difficulties. Three years having passed, a new series of interviews was conducted between January and March 2024. The goal was to review the progress made, the projects already underway and the obstacles that remain for fund managers based in Europe’s main financial centres.

1. REGULATION IS NO LONGER THE ONLY INCENTIVE FOR SUSTAINABLE INVESTMENT: THE ENTIRE ECOSYSTEM HAS EMBRACED ESG

EUROPEAN ENVIRONMENTAL AND SOCIAL REGULATIONS REMAIN AN EFFECTIVE DRIVER FOR FUND MANAGERS TO MAKE THEIR FUNDS GREENER

The transparency requirement on the inclusion of ESG criteria in investment strategies remains a powerful lever for encouraging asset management companies to turn their portfolios green. Consequently, only a handful have not yet begun to take these criteria into account.

In our sample, 80% offer Article 8 or 9 funds, and all of them confirm that new funds will be, at the very least, Article 8.

However, certain factors, such as the challenges related to the quality, availability and cost of data, as well as the lack of clarity in the regulations, are prompting some asset managers to adopt a more conservative approach to fund classification.

INVESTOR DEMAND FOR SUSTAINABLE STRATEGIES REMAINS STRONG

All of the institutional investors in the sample expect their managers to adopt strategies that incorporate ESG criteria.

The need for institutional investors to better address environmental and social risks in the face of climate change has clearly become a prudential obligation. But beyond this, it also responds to the desires of their individual investors, especially the younger ones.

WHAT THIS STUDY REVEALS IS THE PRESSURE EXERTED BY LENDERS TO TAKE ESG CRITERIA INTO ACCOUNT WHEN GRANTING LOANS

Indeed, banks are becoming increasingly demanding towards borrowers, particularly when it comes to real estate and financing property renovations. The asset management company must meet minimum sustainability criteria as a condition of granting the loan.

This is a consequence of the implementation of the Green Asset Ratio publication rules in the banking sector, encouraging them to make their balance sheets greener.

Some asset managers are also benefiting from these new constraints. In property investment, some players are making a competitive argument out of aligning their funds’ assets with the European environmental taxonomy.

ASSET MANAGERS ARE NOW INCREASINGLY APPROACHED BY THE WORLD OF FINTECHS AND CONSULTANTS

Indeed, the market for investment management solutions and consulting has grown rapidly, either alongside or in competition with those providing data and sector analyses.

There are many offerings, often highly innovative and covering a wide range of needs. As a result, these solutions are in great demand among our respondents, with 62% having used them to launch their ESG funds.

2. IN THIS CONTEXT, THE CHOICES MADE BY PLAYERS REMAIN HIGHLY DIVERSE, IN TERMS OF BOTH STRATEGY AND ORGANISATION

THE SIZE OF PLAYERS REMAINS AN OBSTACLE TO THE ADOPTION OF MORE AMBITIOUS STRATEGIES

How ESG criteria are addressed varies from one player to another, and the size of the management companies presents obstacles. Given the increasing level of regulation, they have had to adapt without always having the necessary resources.

Some small asset managers have opted for ESG avoidance strategies to escape their reporting obligations. Despite growing interest in themes such as biodiversity and social issues, the focus often continues to be on climate change, due to a lack of available data in other areas.

Overall, the entire sample applies exclusion rules when choosing investments, but only 80% use ESG criteria. One of the major obstacles is the inability to manage ESG criteria directly in the management tools, particularly for smaller asset managers.

MANAGERS OF REAL ASSETS FACE SPECIFIC PROBLEMS WHILE REMAINING THE MAIN PLAYERS IN IMPACT INVESTMENT

As mentioned above, the issue of financing is tending to become a major constraint for funds that are less advanced in sustainable investment. There is also the difficulty of collecting data on investments.

In this process, Excel is the main tool used to consolidate all this information and draft the required regulatory reports. Procedures are therefore largely manual, and this is a powerful brake on the ambition for more rapid development.

3. THERE ARE MANY NEEDS TO FUEL THE MOMENTUM, BUT SOLUTIONS ARE BEING PUT IN PLACE

AMONG THE ASSET MANAGERS SURVEYED, THE DECISION TO ADOPT SUSTAINABLE STRATEGIES OFTEN COMES FROM THE TOP, BUT CAN ONLY SUCCEED IF TAKEN ON BOARD BY THE TEAMS

Attentive to the needs of their investors, but also holding strong convictions, our respondents’ management teams are, for 30% of them, the main drivers behind the ESG transition of their companies.

To achieve this, they rely on the support of analysts and managers, but they sometimes find it difficult to convince the entire organisation beyond a few specialists who have made sustainability the trademark of their company.

The fact remains, however, that conducting an ESG strategy using only the experts in the field is not the answer for 75% of participants. Training all asset managers in environmental and social issues is therefore a priority.

THE IMPLEMENTATION OF ENGAGEMENT POLICIES IS A UNANIMOUS OBJECTIVE OF THE SURVEY RESPONDENTS, BUT ONE THAT STILL HAS TO BE DEVELOPED

Voting and engagement are areas of progress in the sustainable strategies of the vast majority of the asset managers interviewed. However, the form of this commitment varies from one company to another.

For some players, engagement is taken into account at the moment the investment decision is made. There will be no investment if there is no possible impact on the company’s strategy.

Active engagement is considered to be too resource- and time-intensive, which could act as a barrier to its development and encourage players to stick with less resource-intensive options such as outsourcing.

However, everyone agrees that transparency on votes is the right way to get investors to see the effort that goes into sustainable management strategies.

IN ORDER TO CONTROL THE COSTS INVOLVED IN IMPLEMENTING SUSTAINABLE INVESTMENT STRATEGIES, IT IS BECOMING ESSENTIAL TO CALL ON EXTERNAL EXPERTISE

Choosing totally in-house solutions is out of reach for many and leads to investments that are very difficult to make profitable for those who have made them.

The choice to use external service providers is therefore a natural one, in order to respond to all the different needs.

Securities services providers such as SGSS are playing their part in this movement by offering their customers the benefit of their services or those of fintechs, some of which have been incubated by the Societe Generale group, to meet their development needs at the best possible price.

CONCLUSION

This latest SGSS survey clearly shows how far the investment industry has come in its shift towards sustainable development. Even though the majority of players have adopted strategies in this area, difficulties still lay ahead. Maximising the results will require internal objectives and investments to converge, and external resources and expertise will need to be shared. However, the ball is already rolling on a major transition.

Click here to access the full survey.