- Sustainable investing will shape the investment industry over the next decade, a trend that has been accelerated by the COVID-19 pandemic
- The study identifies the rise of alternative data in analysis and the need for more expertise as key areas of sustainable investing
- Client demand is driving the growth of this trend, with 69% of retail investors and 76% of institutional investors having interest in ESG
A new global research study released by CFA Institute reveals that 85% of investment professionals say that they take ESG factors into account when investing, up from 73% three years ago. The report shows how sustainable investing will shape the investment industry over the next decade, a trend that has been accelerated by the COVID-19 pandemic.
“The Future of Sustainability in Investment Management: From Ideas to Reality” demonstrates that this growth has been driven by client demand, with 69% of retail investors and 76% of institutional investors having interest in ESG. Although the future of sustainable investing includes many unknowns, the study advances three tenets where it goes further than its forerunners: it is additive to investment theory and does not mean a rejection of foundational concepts; it develops deeper insights about how value will be created going forward using environmental, social, and governance considerations; and it considers many stakeholders.
“Incorporating sustainability in investment management has become part of our industry’s mission to serve society by improving long-term outcomes. This moment represents a valuable opportunity for organizations to address this challenge and help shape a future worth investing in. As the focus on sustainability in investing gathers increasing momentum, it will eventually dictate the sustainability of investing itself”, says Margaret Franklin, CFA, President and CEO of CFA Institute.
Key areas of sustainable investing
The report also focuses on four key areas of sustainable investing. The first one is the rise of alternative data and its importance in sustainability analysis: 71% of participants believes that the rise of alternative data will make sustainability analysis more robust, while 62% agree that sustainability is an area where human judgement and active management will thrive, highlighting the often subjective and contextual nature of sustainability data.
The second area is the increased demand for sustainable investing expertise, as there is a relative scarcity of sustainability talent in the investment industry. CFA Institute used LinkedIn Talent Insights and found that the supply of expertise among core investment roles is limited but growing quickly. Of the 1 million LinkedIn investment professional profiles examined, less than 8,000 list ESG as an area of expertise. However, this figure has increased 26% in the last year. Meanwhile, 18% of 1,000 portfolio manager job posts on LinkedIn mention the desire for sustainability-related skills.
This contrasts with the growth of investor demand, that’s driving firms to change their business models and expand product offerings. In this sense, the research points out that, among the various ways to incorporate ESG into the investment process, ESG integration and best-in-class approaches are more popular than negative or exclusionary screening. That’s why future growth opportunities in the product space include ESG index tracking and quant funds, ESG thematic products, ESG multi-asset products, climate transition strategies, long-term engagement, and better benchmarks.
The last key area is the relevance of systems thinking in sustainability analysis. The study concludes that the COVID-19 pandemic has emphasized the urgency of sustainability issues, highlighted the interconnectedness of the financial system, and how corporate value creation both affects, and is affected by, the ecosystem in which it operates. CFA Institute believes that the integration of sustainability issues will require a more widespread application of system-level thinking.
“The demand for sustainable investing continues unabated, driven by push and pull factors, catalyzed by societal expectations, and accelerated by the Covid-19 pandemic. Investment firms that incorporate sustainability into their business models need access to specialist knowledge to enrich their investment capabilities and to bridge the data gaps. Education and training in the ESG space, along with the rise of alternative data sources and enhanced disclosure frameworks, will equip firms to deliver on the potential of sustainable investing”, says Rhodri Preece, CFA, Senior Head of Industry Research for CFA Institute.
All in all, the research explores the influences driving the sustainability trend and sets out implications for investment firms, including the need to better integrate data and to develop expertise to meet client expectations with innovative products. It includes perspectives from over 7,000 industry participants, including investment clients, investment practitioners, ESG specialists, and more.