ESG funds captured a record $51.1 billion of net new money in 2020, and investments are expected to pass $100 trillion by 2030. That will have a big impact on capital markets – but FIS’ 2021 Readiness Report has affirmed that it’s playing out in different ways depending on whether you’re on the sell side or buy side.
On the sell side, the focus is on climate risk and transitioning to renewable energies. Banks are focused on helping their customers measure and optimize their counterparty exposures via advanced risk solutions and services.
For the buy side, it’s more about the investor sentiment. That’s shifting at a dramatic rate, so asset managers need to quickly act to support ESG requirements. For example, they’ll need to score their portfolio – and be able to break it down by environmental, social or governmental components – and report on their ESG credentials to both investors and regulators. Plus they’ll have to normalize the data because there are so many providers.
Artificial intelligence will play a very important role in synthesizing that data and enabling ESG scoring, methodologies, taxonomies and reporting frameworks for the different rules and jurisdictions.
However, while capital market firms continue to publicize their commitment to providing ESG-focused products there seems to be a divergence between public facing trends and internal priorities. According to our latest Readiness Report, surprisingly few are prioritizing ESG-focused products and services to drive growth in the next 12 months: only 18% of buy-side firms and 29% of sell-side. Furthermore, new ESG reporting requirements ranked low among buy-side firms on a list of compliance areas to invest in.
There’s real danger in not investing in these areas. The millennial generation – are more likely to care about environmental and social issues, and they are the next generation of investors. Then combine that with the fact that the buy side is shifting towards self-sufficient investing, moving from government and company-based pensions towards defined contribution and 401(k) plans. There’s also more transparency and awareness.
Wealth and retirement plan providers are reacting to that change in investor demand. However, the asset management industry is further behind and more opaque. How long will traditional investors accept this, before pushing to know the ESG components of those traditional style funds? Investor activity will drive firms to act.
Or it should push them. Bloomberg Intelligence found that by 2025 a third of assets under management will be ESG funds. Whether you’re on the buy side or sell side, if you want to be in business by 2030, you’re going to need a strong ESG program in place. But you have to start acting now.