With interest in ESG funds on the rise, investor demands for transparency are putting pressure on asset managers.
Interest in sustainable investment vehicles has created an ESG fund frenzy. But the demand has also underscored the absence of required industry disclosures or any type of standardization in measuring, analyzing and reporting on ESG fund performance. Asset managers and investors alike have been left to their own devices to determine whether their investments are a) meeting the promised ESG criteria; b) supporting their stated ESG goals; or c) performing as well as other, non-ESG investment vehicles.
The issue is that this lack of regulation has allowed for the proliferation of ‘greenwashing’ — asset managers overstating the sustainability impact of their ESG funds, or otherwise finding it difficult to demonstrate the ESG value-add of such vehicles.
Amid this environment, investors are putting greater pressure than ever on asset managers to prove that they’re making good on their ESG promises. And there’s a significant chance — particularly in the wake of the COP26 summit — that regulatory bodies are soon to follow. A recent example is the voluntary disclosure framework laid out in the 2017 recommendations of the industry-led Task Force on Climate-Related Financial Disclosures (TCFD) has released new guidance relating to metrics, targets and transition plans.
Push for transparency
The sustainable fund sector, especially in the U.S., has long operated under voluntary regulatory and compliance constraints. In March of this year, the EU adopted a required regulatory framework for climate and sustainability related disclosures, and more recently, both the World Economic Forum and the International Sustainability Standards Board have put forward global frameworks. While there are similar recommendations and frameworks in the U.S. — and the SEC has announced its intent to scrutinize the sector more closely — U.S. funds are not currently subject to any disclosure requirements that ensure ESG funds are actually adhering to their sustainability claims.
This lack of regulation has opened the door for misleading marketing and greenwashing, and investors and LPs are taking a more active role in holding asset and fund managers accountable. For example, institutional investors with heavy industry sway, like CalPERS, have doubled down on their due diligence efforts to ensure that all investments meet specific ESG criteria. This has led to an increased need for resources at the manager and fund level to be able to gather, analyze and report on the specific ESG metrics that LPs like CalPERS are requesting.
So, how can fund managers proactively address investor calls for transparency and the increasing requests for data from LPs? And as those calls drive regulators into action, how can fund and asset managers meet the challenges a more stringent compliance framework will create?
Harnessing the power of compliance tech
Technology is the foundation of every business’ plan nowadays, whether it’s an operational shift, a compliance requirement or activity on the trading floor. For asset managers, tech is the strongest weapon in their arsenal — and one that is often lagging. This is no difference when it comes to ESG data.
All managers are facing new hurdles around regulation and compliance that will require additional technology infrastructure. Specifically, the monitoring process for sustainability compliance is especially tech heavy and will require new technology systems as well as additional manpower, creating an overall more costly operations lift. In addition, managers will need to identify key performance metrics related to ESG that are material and relevant to their business in order to know what to track. The fund sector has historically been slow to adopt technology, but amid the industry push for more transparency surrounding ESG funds, now is not the time for firms to crawl toward tech adoption. Managers looking to stand the test of time need to sprint toward tech to meet the rapidly changing regulatory requirements — not to mention investor demands — relating to green investment vehicles.
Looking outside the box
The amount of investment that is required to help meet the transparency demands of investors — and potentially regulators in the future — may be overwhelming for small and medium firms. As a result, fund managers often look to third-party providers to help manage the workload and streamline implementation. IQ-EQ is a leader in this area, providing a turnkey ESG solution that assists managers in the development of their ESG strategies and gives them a powerful technology solution to gather, analyze and report on their ESG metrics.
IQ-EQ’s integrated ESG compliance offering helps asset managers institute and maintain an ESG strategy by building customized ESG frameworks. And IQ EQ Compass provides a modern, integrated dashboard leveraging multiple data sources to accurately monitor, analyze and report on ESG metrics for fund managers, helping to lighten the load when it comes to sharing sustainability performance data with shareholders. Having a flexible and customizable platform is key to fund managers, as no one fund shop’s requirements will be alike in the absence of industry-wide standardization.
What’s next for managers?
With sustainable funds on the upswing, and with no signs of slowing down, managers are looking for ways to address external pressures around greenwashing and ESG performance reporting while mitigating operational costs. In addition, the potential implementation of more concrete regulations means managers must stay up to date on their technology as they continue to respond to calls for greater transparency. Small and medium asset managers are turning increasingly to service providers to help navigate the ever-changing sustainability compliance landscape, but even larger managers are looking to outsource their ESG compliance to help lower overall costs. The next few years will be pivotal when it comes to sustainability compliance, and firms’ technology stacks must be ready to weather the storm.