Sustainable investment: History is on the move!
Results of the survey conducted in the first half of 2021 by Societe Generale Securities Services
When it comes to finance, ESG1 is obviously not a new issue, but 2021 is undoubtedly a pivotal year for its adoption and implementation in asset managers' strategies. European regulation clearly has a lot to do with this, even if the longstanding conviction of many managers cannot be doubted.
To understand the maturity of these players' strategies, their ambitions but also their difficulties and their support needs, we conducted a series of interviews with some thirty buyside players and several consultants between February and May 2021.
The survey covered institutions in the main financial centres of continental Europe. Three quarters of the managers surveyed were managers of funds subject to the UCITS2 directives (hereinafter referred to as UCITS funds), but private market players were not forgotten, nor were some institutional investors. Players with assets under management of less than EUR 20 billion were given priority. The results of the interviews with the decision makers of the sustainable investment policies of the companies surveyed were put into perspective by interviews with specialist consultants in each country to ensure their representativeness and to provide an overall view.
Three trends emerge from this survey:
1. All the players we met have implemented or are working on integrating investment sustainability into their strategy
If the ultimate goal of the European regulation, which is gradually being implemented, was to encourage all players to integrate ESG into their management policies, the objective has been achieved.
Indeed, only two players in our sample did not yet have a strategy in place. However, it should be noted that they were actively working to remedy this situation, aware that they could not avoid this aspect for long.
It is therefore certain that regulation has played an accelerating role for some. However, it should also be noted that the fear of missing out on the priorities of many investors, whether institutional or individual, also weighed in on the decision to take the plunge for many of our interviewees.
It would be unfair, however, to focus solely on the reactive behaviour of managers. Indeed, many of them have long been building an identity as responsible managers. Moreover, the subject is often addressed at the highest level of the decision-making chain. We were often in contact with the CEO himself/herself, who considered this topic to be strategic for his/her company.
The analysis of the policies implemented reflects the different maturities of our interlocutors: for many, ESG remains a matter of exclusion or best-in-class strategies. However, others have resolutely adopted broader ambitions by choosing to set up positive impact funds.
Nevertheless, this results in a very large majority of funds being classified as Article 8 in the SFDR classification. However, it should also be noted that several managers with very strong ESG convictions and strategies that undoubtedly qualify for Article 9 have preferred to classify their funds in a lower category (Article 8 or even 6). They did so because they did not have sufficient visibility on the obligations attached to each of these levels with regard to a regulation that has not yet been fully implemented.
Furthermore, the use of labels for ESG funds is a general practice. Only three of our interviewees did not have one. These labels are generally those in force in the countries where the funds are marketed (SRI in France, for example, or LuxFLAG in Luxembourg). Many asset management companies confirm their commitment to sustainable investment by being signatories to the United Nations Principles for Sustainable Investment (UNPRI) or initiatives such as the Carbon Disclosure Project and make this a pillar of their communication on their commitments.
Finally, only two of our interviewees do not vote at the General Meetings of the companies in which they invest. The others use specialised proxy voting companies, sometimes very selectively (a few votes per year on the main lines) so as not to burden their costs. More than half also have "commitment" policies (in consortium or not) and use the results to illustrate their activism with the holdings in their portfolios.
2. ESG data sourcing and its use in the operational chain of management is at the heart of concerns
It is clear that the choice of data used is essential for the definition and implementation of sustainable investment strategies.
In this respect, at least for UCITS funds, the range of external providers available is wide, with specialities displayed by theme, by geographical area and by the universe of tracked assets.
We found that all of our interviewees use at least two ESG data providers, sometimes up to six, depending on the orientations chosen as investment criteria for the funds.
However, it is rare that the managers interviewed use the assessments of these external analysts without making their own adjustments. In most cases (more than three quarters of the cases observed), they use their own data, determined according to their assessments of the performance of the companies in which they invest with regard to the selected ESG criteria. The external data is then only a working basis or is kept for the secondary criteria of the strategy.
These practices further underline the commitment of the players through their appropriation of the analysis methodologies.
Moreover, for some of them, the desire to fully master the algorithms for calculating the non-financial performance of their holdings leads them to seek out raw, unprocessed data.
This is often a difficult requirement to achieve on a large scale, if each company has to be interviewed individually. However, many providers in the market are also able to provide this data, which is meeting a growing appetite from their customers.
Beyond the choice of data, the other subject that often comes up in the operational concerns of our interlocutors is the integration of this data in decision-making and portfolio management tools.
How can ESG criteria be used as a management tool if all this data is managed in a database and in tools that are separate from the main management database? Such a configuration only allows exclusions and prevents simple and quick impact simulations.
The issue of integrating ESG data into the PMS and, beyond, into all control and middle-office processes, is therefore a central need, mentioned by several of our contacts, to facilitate the adoption of more ambitious strategies and their implementation under better operational conditions.
3. Private Markets players face particular challenges in implementing their strategies
The players surveyed showed a very remarkable level of commitment and maturity in terms of sustainable investment: almost three-quarters of the sample offer a range of funds, more than two-thirds of which are ESG funds.
However, it is clear that Private Markets managers face the most complex challenges.
First of all, there are few external data providers, so they have to collect data directly from their holdings. This task is often tedious because the Private Assets universe is so disparate and non standardised. It therefore requires a lot of manual work and multiple contacts with a wide variety of players, not only the management of the holdings themselves but also their auditors or technical analysis and research firms.
Secondly, the use of this data is often hampered by a lack of equipment on the part of managers who, for the most part, do not have a single database, often abuse Excel for many of their analyses, and juggle different management environments.
Finally, the need for market references against which to compare their performance is also often mentioned as a reason for the scarcity of a matching offer.
All in all, for many of them, taking sustainable investment criteria into account is a substantial challenge that further underlines the fragility of operational organisations by pushing them to the limit. Similarly, they consider that the SFDR regulation is not adapted to the reality of their assets and do not see how they will be able to obtain the information required for the ad hoc reports.
ESG is clearly high on the agenda of managers and one of their top concerns.
This survey shows that the market is very dynamic and responds well to the ambitions of investors and regulators in this area.
However, while the opportunities to differentiate oneself in the field of ESG, which remains largely in the hands of the asset management players and which is slow to become standardised, are substantial, , the difficulties in implementing the strategies expected by investors are numerous and a source of real fears for our interlocutors.
Delays in the publication of the Regulatory Technical Standards (RTS) are giving some respite to the less advanced players, but the overall trajectory of sustainable investment is not slowing down and there is no doubt that the subject will remain at the centre of action plans for the coming years.
1 Environment, Social and Governance
2 Undertakings for Collective Investments in Transferable Securities
3 Sustainable Finance Disclosure Regulation
4 Portfolio Management System: portfolio management platform