Sustainability in investment management at a pivotal juncture; demand will drive growth if industry adapts, new CFA Institute report shows

CFA Institute, the global association of investment professionals, has released a new global research study that examines the state of sustainable investing and how this trend – accelerated by the COVID-19 pandemic – will shape the investment industry over the next decade. Among the findings, 85 percent of CFA Institute members surveyed now say that they take E, S and/or G factors into account when investing, up from 73 percent just three years ago. This growth has been driven by client demand, with 69 percent of retail investors and 76 percent of institutional investors having interest in ESG investing.

The report,The Future of Sustainability in Investment Management: From Ideas to Reality, explores the influences driving the sustainability trend and sets out implications for investment firms, including the need to better integrate sustainability data and to develop sustainability expertise to meet client expectations with innovative products. The research includes perspectives from over 7,000 industry participants, including investment clients, investment practitioners, ESG specialists, and more.

Although the future of sustainable investing includes many unknowns, the report advances three important tenets where sustainable investing goes further than its forerunners:

• It is additive to investment theory and does not mean a rejection of foundational concepts.
• It develops deeper insights about how value will be created going forward using environmental, social, and governance (ESG) considerations.
• It considers many stakeholders.

The report concludes with actions that investment firms and professionals can take to advance the transition toward sustainability in investment management.

“Incorporating sustainability in investment management has become part of our industry’s mission to serve society by improving long-term outcomes ,“said Margaret Franklin, CFA, President and CEO of CFA Institute. “This moment represents a valuable opportunity for organizations to address this challenge and help shape a future worth investing in. As the focus on sustainability in investing gathers increasing momentum, it will eventually dictate the sustainability of investing itself.”

In addition to these findings, the report focuses on four key areas of sustainable investing:

• The rise of alternative data and its importance in sustainability analysis: Technology is a necessary foundation for competitive advantage in ESG analysis, with more data sources becoming available and more differentiation among data. 71 percent of roundtable participants believed that the rise of alternative data will make sustainability analysis more robust, while 62 per cent agreed that sustainability is an area where human judgement and active management will thrive, highlighting the often subjective and contextual nature of sustainability data.
• Increased demand for sustainable investing expertise: There is a relative scarcity of sustainability talent in the investment industry. CFA Institute used LinkedIn Talent Insights and found that the supply of expertise among core investment roles is limited but growing quickly. Of the 1 million LinkedIn investment professional profiles examined, less than 8,000 list ESG as an area of expertise. However, CFA Institute found that this figure has increased 26 per cent in the last year. Meanwhile, a review of 1,000+ portfolio manager job posts on LinkedIn found that approximately 18 per cent mentioned the desire for sustainability-related skills.
• Investor demand is driving firms to change their investment models and expand product offerings: Among the various ways to incorporate ESG into the investment process, ESG integration and best-in-class approaches are more popular than negative or exclusionary screening, highlighting the evolution of ESG techniques, enabled by improvements in data. Future growth opportunities in the product space include ESG index tracking and quant funds, ESG thematic products, ESG multi-asset products, climate transition strategies, long-term engagement, and better benchmarks.
• The relevance of systems thinking in sustainability analysis: The COVID-19 pandemic has emphasized the urgency of sustainability issues, highlighted the interconnectedness of the financial system, and how corporate value creation both affects, and is affected by, the ecosystem in which it operates. The integration of sustainability issues will require a more widespread application of system-level thinking.

“The demand for sustainable investing continues unabated, driven by push and pull factors, catalyzed by societal expectations, and accelerated by the Covid-19 pandemic.” said Rhodri Preece, CFA, Senior Head of Industry Research for CFA Institute. “Investment firms that incorporate sustainability into their business models need access to specialist knowledge to enrich their investment capabilities and to bridge the data gaps. Education and training in the ESG space, along with the rise of alternative data sources and enhanced disclosure frameworks, will equip firms to deliver on the potential of sustainable investing.”

For further information please contact [email protected].

Notes to Editors

Methodology

The report is informed by views of more than 7,000 industry participants. Inputs to the report include the following:

• 4,400+ investment clients: 3,525 retail investors (minimum assets of US$100,000) and 921 institutional investors (pension funds, endowments, foundations, insurance companies, and sovereign funds of US$50 million assets under management or greater) across 15 markets, surveyed in October/November 2019 by Greenwich Associates.
• 2,800+ investment practitioners: CFA Institute members globally, including 325 from the C-suite and 373 ESG specialists, surveyed in March 2020.
• 250+ participants in 23 virtual roundtables and interviews, including investment professionals, ESG service providers, policymakers, and academics from 31 markets.
• Insights from desk research and other CFA Institute publications.