How asset and wealth managers can step up to the mark on ESG

The coronavirus (COVID-19) emergency has heightened the already growing focus on environmental, social and governance (ESG) performance within asset and wealth management (AWM). How then can your business get up to speed?

Even before the COVID-19 outbreak, 2020 had looked set to be a watershed year for ESG. In a Dear CEO letter, for example, the leader of the world’s largest asset manager had argued that climate change has put us on the “edge of a fundamental reshaping of finance”. 

In turn, ESG is moving to the centre of the regulatory agenda, albeit at different speeds in different regions. In March 2018, the European Commission issued its Action Plan on Financing Sustainable Growth. Key objectives include more active management of the risks stemming from climate change and directing finance towards sustainable and inclusive growth. As we outline in a new report, Sustainable Finance, a new era for asset managers, the likely impact on business you carry out in the EU includes the need to systematically ask investors about their ESG preferences and offer products that match this. It’s also likely that you’ll need to disclose any potentially adverse impact on sustainability in your investment decisions. 

The COVID-19 outbreak is heightening the focus on ESG. In the short-term, this includes sustaining investment as businesses and jobs come under threat. COVID-19 has also highlighted the link between environmental issues and the emergence of pandemics and other threats to health. 

Investor pressure

Further pressure on ESG has been coming from investors. A survey of what really matters to retail and institutional investors PwC carried out in 2019 underlined how quickly ESG is becoming a key priority. While investors are focusing more closely on ESG, they don’t want to see any dip in financial performance as a result. The ability to deliver on both fronts has therefore come to define outstanding performance, while providing significant opportunities for fund development and differentiation. 

Moreover, there are vital financial issues tied to ESG, ranging from the potential for stranded fossil fuel assets to the costs of moving businesses to low carbon emission production and distribution. Indeed, it’s clear that some investors see ESG as an opportunity to curb risks within their portfolio. 

The impact of COVID-19 could sharpen the focus on ESG by providing a catalyst for investor reviews of performance and possible switches in mandates. ESG ratings are likely to be an important part of this.  

Gauging progress

Is the AWM industry keeping pace with these changing investor and regulatory expectations? The last few years have seen growth in the availability of sustainable funds and closer focus on ESG within wider portfolios. Some firms have gone further by looking to integrate ESG within their entire product range. But what about the industry as a whole? Looking back to early in the year, it was fascinating to explore the attitudes to climate change among the AWM leaders taking part in PwC’s latest Annual Global Survey. AWM CEOs acknowledged stakeholders’ rising expectations on this issue. However, in judging how quickly AWM CEOs were moving in response, it’s telling that they primarily saw climate change as a reputational issue, with fewer citing product and service opportunities.

Up to speed

What then are the priorities ahead? The coming months and years are likely to see fundamental strategic and operational shifts as your business adjusts to the post-COVID-19 realities. I believe that ESG should form a central plank of this business review:

1/ Redefining purpose 

The growing focus on ESG underlines the importance of ensuring that your mission reflects changing stakeholder priorities.    

2/ Investment in talent and technology  

While ESG is an opportunity to stand out from the pack, it requires considerable investment in talent and embedding within operations, governance and accountability across your organisation. 

3/ Front-to-back governance 

ESG demands a front to back office focus, which not only looks at investment selection, but also performance evaluation and oversight across your organisation to ensure that your business is living up to its promises.  

4/ Build into new reporting capabilities 

Both investors and regulators expect even more information on portfolio selection and performance. It’s important to build ESG into this overhaul of reporting. 

Pulling ahead

ESG cannot be ignored. The pace of regulation and growth in demand may vary by region, but the long-term direction is clear. COVID-19 will accelerate this. In a market that has seen a rise in investor uncertainty and redemption, ESG could provide a powerful draw for attracting funds and sustaining investor buy-in. It can’t be an add-on or nice-to-have, however. It requires a significant rethink of how you manage your portfolio and how you define success. 

? 2020 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with a professional advisor.