In conjunction with Clear Path Analysis, Moody’s Analytics conducted surveys amongst financial services investment leaders to gauge asset owners’ thoughts affecting the market. Topics that were covered included whether ESG implantation in the industry was currently excelling, as well as where its implementation needed more attention.
The full list of survey inquiries is below; respondents rated the statements from “strongly agree” to “strongly disagree”:
Matt Bale: The survey statements – which I’ll be referring to – cover opinions of asset owners, and I mean asset owner in a broad sense. This could be an individual investor (wealth investor or a Defined Contribution pension), or it could be a defined benefit pension plan, an insurance company, a family office, or a charity. The same themes apply to any of those groups.
There are three broad reasons that asset owners think about ESG investing.
Firstly, they think it's the right thing to do. That could mean them personally thinking that it’s the right thing to do, or it could be the regulators telling them it’s the right thing to do, but I would put those in the same bucket.
"Asset owners may believe that these sectors might be much more materially
impacted by climate change than other sectors."
The second reason is they expect ESG to be an opportunity to outperform. They believe that ESG-aware investing is going to offer opportunities to outperform investment strategies that do not incorporate ESG views. Put another way, asset owners think that there’s some performance gain to be had by investing in this area.
The third reason is that, in the long term, they're worried about certain sectors – oil and gas, for example. Asset owners may believe that these sectors might be much more materially impacted by climate change than other sectors. Therefore, they’ve got their risk management hat on and want to be more cautious in certain sectors over the long term.
My assumption prior to seeing that survey results was that the first reason was by far the most important. However, the survey results were crystal clear that the potential performance and risk management benefits are critically important as well – which is the point that came through strongest for me.
If you look at survey question two, which is about the long-term asset outperformance benefits of ESG investing, there's around six times as many people saying that it’s important as the number that didn’t. With the risk management perspective in question one, five times as many people thought that was important as didn't. This trend clearly shows the importance of these aspects – as well as simply being the right thing to do.
Matt: There's a component of a self-fulfilling prophecy for the industry in that because ESG has taken off so quickly and lots of money has gone into it, it will push up the prices of assets that are ESG-friendly.
I'm sure if you looked at the data, ESG-friendly stocks would have outperformed others over the last two-to-five years. Now, exactly how much of that is due to their business model versus the volume of money being invested in those stocks, it’s hard to say and difficult to pick apart.
Matt: We touched on the fact that ESG is taking off quickly and, in part, that's because asset owners believe that there's a performance benefit or risk management benefit of ESG-aware investing. The asset management market has clearly evolved to now offer a range of ESG solutions that cater to this emerging demand. The next challenge for the industry is that asset owners now expect managers to report on the effectiveness of these new products – which is a fair expectation.
"We're going to see - and what the survey says we'll see - is now asset owners
demanding the same level of insight from their managers around ESG."
To take a simple example of a traditional credit fund: if I've been an investor in that fund, what has a credit manager provided me with? Well, there’s confidence in that they know what they're doing and that they have the tools internally to monitor and manage the interest rate risk, the credit risk, the FX risk, if you're investing overseas, of the portfolio that they're managing, and they report to me regularly on how they’re doing. I get a quarterly report that says that we've outperformed our benchmark by 50 basis points, and an analysis detailing the reasons why.
Now, with ESG investing taking off, we're going to see - and what the survey says we'll see - is now asset owners demanding the same level of insight from their managers around ESG. If I've launched and sold an ESG-friendly credit index, what am I expecting my manager to provide to me? I’m expecting them to provide me with the same report they always have done – detailing credit performance and interest rate performance, but now also explaining how they’ve positioned the portfolio from an ESG perspective. How has that impacted the performance of the fund over time?
That's a reasonable expectation; if you sold something that purports to deliver performance or risk management benefits, then you'd expect to see an analysis of those factors come through in your reporting. How to report on these new themes is a big challenge for the industry.
Matt: It's a reasonable expectation from asset owners that managers can deliver reports that explain to them how they are doing from an ESG perspective.
The next question is, therefore, are managers equipped to deliver those reports. The member survey was clear on this: it said no. There’s a five-to-one ratio of respondents saying they don’t think managers were equipped to provide that information to their clients. Put bluntly it says that in many cases they’ve delivered a solution to their client and can’t report on its effectiveness over time.
"We asked would ESG analysis be a differentiator for an asset manager,
and 15-to-one said, yes, it would be a differentiator."
That's not a great position to be in, but I think the reason for it is that ESG has taken off so quickly and managers are often using old legacy systems. A lot of the risk, performance, and attribution tools that exist in the market were created long before any ESG themes had taken off – which means that they’re managing the portfolio on systems that can't quantify and report on the risks that are being run. That's not a great position to be in.
However, the survey did offer some encouragement on this front. We asked would ESG analysis be a differentiator for an asset manager, and 15-to-one said, yes, it would be a differentiator, which was the clearest of all of the responses. For those asset managers that can communicate effectively to clients what they're doing and why their ESG strategies deliver value over time, which will be a differentiator, and hopefully we'll see them grow and maintain assets under management.
So, those that are willing to invest in getting the right tools in place will see benefits in the ESG space. That’s been a focus of Moody’s Analytics for the last few years: building tools with the flexibility to capture evolving investment themes such as ESG. In many ways, we had the luxury of coming at this problem with a blank sheet of paper late, which meant that we could offer something that many of our competitors can't.
Matt: The results were ultra-clear that asset owners believe there are performance and risk management benefits to investing in ESG. They expect their managers to be able to report on that through time and demonstrate that they’re being effective in the way they manage it.
But there is a challenge, which is that the systems aren't there today to deliver that information, so the industry needs to invest in adapting to this change.
