More and more asset owners consider their portfolio's environmental, social, and corporate governance (ESG) criteria. This shift reflects the rising number of ethically-minded investors. It also signals an awareness of environment-related financial risks.
While this move towards sustainable financial practices entails benefits for the environment and asset-owners, it poses unique challenges for asset managers.
This article will consider the change in investor expectations and the adjustments asset managers can make to provide the best possible service.
Investors Care About the Environment
The fiduciary duty of an asset manager includes the responsibility to incorporate the sustainability preferences of their clients into their decision-making (Fiduciary Duty (UNEPFI, 2019)).
Investors care about the environmental standards of their portfolios now more than ever.
In fact, 85% of the population is interested in sustainable investing (Sustainable Signals (Morgan Stanley, 2019)), a 10% rise in only four years.
Morgan Stanley also found that over 90% of millennials want to track the environmental footprint on their investments (Sustainable Signals (Morgan Stanley, 2019)).
These findings show that the expectations of asset owners are changing. They want a broader range of sustainable options and up-to-date information on the environmental impact of their portfolio.
In 2021, asset owners thought that the most important factor when choosing an asset manager for ESG focused investments was disclosure and reporting capability (BNP Paribas 2021).
To fulfil this expectation of transparency, asset managers need access to data at scale on the issues that matter to their clients.
Upcoming legislation such as the UK's Greening Finance Roadmap (2021) and the EU's Green New Deal (2019) will improve the quality and quantity of data available to investors.
Yet, there are still gaps in the consistency and accessibility of this data.
In 2021, asset managers ranked lack of data as the most significant barrier to the implementation of ESG strategies across their portfolios (BNP Paribas 2021).
As such, providing asset owners with the reports and information they seek is a challenging task.
Asset managers cannot provide this transparency without credible and science-based data on the climate impact of their decisions.
Solutions like mandatory environmental disclosure regulations such as the Sustainable Finance Disclosure Regulation (EU Commission 2021) are a first step. However, NatureAlpha's tool fills the biodiversity data gap by providing asset managers with nature impact information at scale. Click here to learn more www.naturealpha.ai.
Ensuring the long-term resilience of an investment
Asset managers must also consider the long-term resilience of an investment as part of their fiduciary duty.
As a result, integrating ESG considerations into investment decision making is increasingly essential. It is not only profitable to do so (Fiduciary Duty (UNEPFI, 2019)) but also crucial to mitigate long-term financial risks associated with the environment (NRF, 2020).
A key example of this is the potential financial impact of global biodiversity loss.
The UN found that biodiversity loss threatens 80% of sustainable development goals set for 2030 (UN 2019).
Similarly, the World Economic Forum (WEF) ranks natural degradation as one of the top five global risks for the next decade by likelihood and impact (WEF 2021).
This predicted biodiversity loss would significantly impact the global economy as $44 trillion of assets under management are moderately or highly dependent on nature (WEF 2021).
The difficulty is being able to mitigate risks like biodiversity loss. Where asset managers can predict the influence of climate change on an asset, they can make informed decisions with long-term financial security in mind.
However, the lack of accurate data available at scale makes this challenging.
The data gap exposes asset owners to unpredictable risks. It could, therefore, impede asset managers from fulfilling their fiduciary duty to their clients.
The solution is accessing user-friendly biodiversity data at scale www.naturealpha.ai.
The changing expectations for asset managers
The increasing focus on environmental investing practices is demanding more of asset managers.
Asset owners increasingly expect transparency, meaning managers need to access and communicate accurate environmental impact information.
They must also consider numerous environmental and biodiversity factors to mitigate long-term risk. However, these challenges are not insurmountable.
For example, NatureAlpha can provide user-friendly biodiversity investment data at scale for the first time.
Asset managers can use this to facilitate accurate tracking of investment impact and mitigate the possibility of risk-related financial losses.
NatureAlpha can help asset managers safeguard their clients' sustainability preferences and financial security.
Get in touch to learn more about how you can include science-based risk and impact data in your investment decision making - contact@naturealpha.ai .
