Trend 3: Growing demand to understand ESG performance of the portfolio against desired objectives will drive the need for enhanced reporting
With investors looking at ESG as a value-based dimension of their portfolio, they increasingly want to understand ESG performance the same way they would any other traditional financial measure.
This, along with demand from beneficiaries and stakeholders for greater insight into the ESG profile of their investments, is leading to greater interest in robust ESG reporting along dimensions such as carbon intensity, controversy exposure, and overall ESG profile.
Trend 4: Climate solutions will evolve to include adaptation alongside mitigation
For asset owners who seek to invest in a way that is aware of and responsive to climate change, solutions in the marketplace have traditionally focused on mitigation: reducing the effects of climate change on a portfolio by, for example, reducing exposure to greenhouse gases and increasing exposure to “green” energy companies.
As extreme weather events become more frequent and the economic impacts of climate change more widely understood and accepted3, investors will require companies to disclose how they are adapting their business strategies to accommodate the impacts of climate change. This is particularly true of those investors who are committed to the Task Force on Climate-related Financial Disclosures (TCFD). Consequently, management and boards will need to fully incorporate climate change into their long-term strategies. Investors on the leading edge of climate investing will seek to enhance their climate investment from pure mitigation strategies to those that align to a mitigation and adaptation investment thesis.
Trend 5: Mainstreaming of ESG will drive investments in talent and infrastructure
ESG investing no longer lives in a silo as it once did. Increasingly, ESG is being integrated into the routine investment processes of asset managers. Because of this, the demand for experienced ESG professionals is acute. ESG investing is a specialized field that requires interdisciplinary knowledge and a variety of capabilities –deep investment expertise, strong policy and strategic analysis, and the ability to communicate to stakeholders who often use differing ESG-related terminology.
To build robust ESG capabilities, firms will require talent that can do each of these things well. It also will require training of current investment and sales teams, as well as investments in data, analytics and reporting infrastructure to allow for full integration.