06 May Keeping up with the ESG trend
Environmental, social, and governance issues, or ESG, have become a popular theme in the investment world. ESG focuses on three main areas of concern that are also central factors in measuring the sustainability and ethical impact of an investment in a company or business. This broad set of guidelines has shifted the focus of evaluating investment strategies away from financial factors such as equity valuation, corporate, and fixed-income investments to non-financial factors such as gender equity and climate action initiatives. PwC’s latest report forecasts that by 2025, up to 57% of mutual fund assets in Europe will be held in funds that consider ESG factors. This inclusion of ESG in mutual funds is a massive jump from the current rate of 15.1%1.
Throughout my career in asset management and wealth management since the early 2000s, I have continued to see strong evidence that having investments linked to ESG is a proven strategy to improve risk-adjusted returns. There is a belief that companies that have good ESG protocol tend to have lower systematic risk and produce a higher risk premium. Even if investors do not yet see the correlation between risk and returns with respect to ESG, ESG information is still helpful for investors to understand and assess a company’s reputational, legal, and regulatory risks2. Therefore, there is a strong need for ESG information to be made readily available to all investors.
We all know that FinTech is well integrated into the wealth management business. With ESG gaining popularity, FinTech companies need to start planning to adapt and support this new investment trend to meet clients’ and advisors’ needs. Putting aside the actual costs of implementation, there is little reason why more FinTech companies cannot get on the ESG bandwagon.
1. ESG data is already being tracked and measured
Various institutions have started to develop frameworks and standards to address current challenges regarding sustainability. The United Nations, for example, has developed its Sustainable Development Goal framework (SDG) including 17 goals to help guide companies to achieve a better sustainable future3. Other institutions, such as the CFA Institute, are also developing disclosure and reporting standards and pushing for ESG factors to be included in financial analysis4. Meanwhile, major providers such as MSCI and Bloomberg already have ESG data, scores, and research on companies that allow investors and portfolio managers to assess sustainability and performance related to ESG in their investment decisions, and much ESG data is available already. The critical issue that the industry should explore is data standardization so that data from different sources can be compared. When we get to that point, retail investors will embrace and understand how to fully use ESG data because most of the data currently available is tailored to asset managers and institutional investors who have extensive knowledge on understanding and comparing non-standardized ESG data.
2. Most investors are not looking for complex or sophisticated data
Studies have shown that investors look at ESG information primarily as an additional source of data that can contribute to their investment portfolios’ investment performance and risk management5. As previously mentioned, most investors, especially retail investors, are not looking for complicated or sophisticated data. Many investors just need simple access to ESG data while they are reviewing their investments. This can be done by having the ESG data illustrated in client investment statements for each company to show the company’s impact on sustainable development goals (for example, climate action and affordable clean energy) or having a link to ESG data on the user interface while clients are accessing their accounts online.
3. FinTech is transforming the wealth management business towards a more modular architecture
There is no doubt that technology is transforming the wealth management technology interface to become a more modular product. In the past, every step of the wealth management process was integrated. Firms have to strategize and plan every step of the client journey from KYC to asset allocation to rebalancing because making a technological change in one area will have an impact on another area. With FinTech companies specializing in specific areas on the rise, wealth management companies have become more and more modular by bringing on technology tools offered by different FinTech companies. This gives companies the flexibility to add, modify, or delete technology tools quickly; cutting the wealth management architecture piece by piece makes it easier for companies to adopt new technologies and algorithms for ESG purposes. For this reason, the costs of implementation from a technology perspective would be more manageable.
At Croesus, we understand that the financial industry is evolving quickly. With ESG investing becoming an integral part of portfolio management, investors, advisors, and portfolio managers will need to discover new ways to take advantage of ESG investing in their investment portfolios. There are good reasons for FinTech companies to look at their pipelines and start planning for the roll-out of ESG data-sharing capabilities. Croesus strives to keep up with all of these recent investment trends to provide the most optimal wealth management solution to our clients.
1 2022 – The growth opportunity of the century: Are you ready for the ESG change?
https://www.pwc.lu/en/sustainable-finance/esg-report-the-growth-opportunity-of-the-century.html
2 Amel-Zadeh, Amir, and George Serafeim. “Why and How Investors Use ESG Information: Evidence from a Global Survey.” Harvard Business School Working Paper, No. 17-079, February 2017,
http://nrs.harvard.edu/urn-3:HUL.InstRepos:30838135
3 United Nation’s 17 sustainable development goals,
https://www.un.org/sustainabledevelopment/sustainable-development-goals/
4 CFA Institute’s investment and analysis on ESG factors in financial analysis,
https://www.cfainstitute.org/en/research/esg-investing
5 Amel-Zadeh, Amir, and George Serafeim. “Why and How Investors Use ESG Information: Evidence from a Global Survey.” Harvard Business School Working Paper, No. 17-079, February 2017,
http://nrs.harvard.edu/urn-3:HUL.InstRepos:30838135