Sustainable investment: time to converge

Regulation is no longer the only incentive for sustainable investment: the entire ecosystem has embraced ESG¹

ESG regulations remain an effective driver for fund managers to make their funds greener

The transparency requirement on the inclusion of ESG criteria in investment strategies remains a powerful lever for encouraging asset managers to turn their portfolios green. In our sample, 80% offer Article 8 or 9 funds, and all of them confirm that new funds will be, at the very least, Article 8. However, certain factors, such as the challenges related to the quality, availability and cost of data, as well as the lack of clarity in the regulations, are prompting some asset managers to adopt a more conservative approach to fund classification.

Investor demand for sustainable strategies remains strong

All of the institutional investors in the sample expect their managers to adopt strategies that incorporate ESG criteria. The need for institutional investors to better address environmental and social risks in the face of climate change has clearly become a prudential obligation. But beyond this, it also responds to the desires of their individual investors, especially the younger ones.

This study reveals the pressure exerted by lenders to take ESG criteria into account when granting loans

Banks are becoming increasingly demanding towards borrowers, particularly when it comes to real estate and financing property renovations. The asset management company must meet minimum sustainability criteria as a condition of granting the loan.

Asset managers are increasingly approached by fintechs and consultants

The market for investment management solutions and consulting has grown rapidly. There are many offerings, covering a wide range of needs. As a result, these solutions are in great demand among our respondents, with 62% having used them to launch their ESG funds.

The choices made by players remain highly diverse, in terms of both strategy and organisation

The size of players remains an obstacle to the adoption of more ambitious strategies

How ESG criteria are addressed varies from one player to another, and the size of the management companies presents obstacles. Given the increasing level of regulation, they have had to adapt without always having the necessary resources. Overall, the entire sample applies exclusion rules when choosing investments, but only 80% use ESG criteria. One of the obstacles is the inability to manage them directly in the management tools, particularly for smaller asset managers.

Managers of real assets face specific problems while remaining the main players in impact investment

As mentioned above, the issue of financing is becoming a major constraint for funds that are less advanced in sustainable investment. There is also the difficulty of collecting data on investments. In this process, Excel is the main tool used to consolidate all this information and draft the required regulatory reports. Procedures are therefore largely manual...

There are many needs to fuel the momentum, but solutions are being put in place

The decision to adopt sustainable strategies often comes from the top, but can only succeed if taken on board by the teams

Attentive to the needs of their investors, but also holding strong convictions, our respondents’ management teams are, for 30% of them, the main drivers behind the ESG transition of their companies. To achieve this, they rely on the support of analysts and managers, but sometimes find it difficult to convince the entire organisation. Training all asset managers in environmental and social issues is a priority.

The implementation of engagement policies is a unanimous objective, but still has to be developed

Voting and engagement are areas of progress in the sustainable strategies of the vast majority of the asset managers interviewed. However, the form of this commitment varies from one to another. For some players, engagement is taken into account at the moment the investment decision is made. There is no investment if there is no possible impact on the company’s strategy. Active engagement is consideredtobetooresource- and time-intensive, which could act as a barrier to its development and encourage players to stick with less resource- intensive options such as outsourcing. However, everyone agrees that transparency on votes is the right way to get investors to see the effort that goes into sustainable management strategies.

To control the cost of implementing sustainable investment strategies, external expertise is becoming essential

Choosing totally in-house solutions is out of reach for many and leads to investments that are very difficult to make profitable. The choice to use external service providers is therefore a natural one to meet all the different needs. Securities services providers such as SGSS are playing their part in this movement by offering their customers the benefit of their services or those of fintechs.

Conclusion

This latest SGSS survey clearly shows how far the investment industry has come in its shift towards sustainable development. Even though the majority of players have adopted strategies in this area, difficulties still lay ahead. Maximising the results will require internal objectives and investments to converge, and external resources and expertise will need to be shared. However, the ball is already rolling on a major transition.

Read the 2024 SGSS' ESG Survey.

¹Environment, Social, Governance.

Fouad Massabni, Head of ESG commercial offer, Societe Generale Securities Services (SGSS)