The generalist ESG fund is out.
With demand at a record high — and an equal number of competitors bidding for the business — asset managers need to launch more specialist products if they hope to attract a critical mass of investors.
Consider this statistic: the number of institutional investment managers who reported having at least one ESG-aligned fund in their product lineup has grown nearly 300 percent since 2016, according to a Deloitte analysis of the supply and demand for these funds. Tania Taylor, national investment management audit leader, and Sean Collins, a research manager, calculated this number by reviewing 13F and Form D filings submitted to the Securities and Exchange Commission. Managers file 13Fs to disclose their equity holdings and use Form D for any new offerings.
Now, these funds have saturated the market. ESG funds with a general mandate grew from 28 percent of the total category in 2016 to 53 percent by the third quarter of 2021.
“It may be more difficult for new general ESG funds to gain traction,” wrote Taylor and Collins in the Deloitte study.
Jason Saul, founder and executive director of the Center for Impact Sciences at the University of Chicago who is focused on measuring social impact, said a number of trends underpin the growth of ESG over the past few years. One is the simple broadening of the definition of ESG itself.
Beyond that, Saul attributed the growth to the shift away from investing strictly in hard assets, like real estate and commodities, and a move toward more conceptual investments in brands, company frameworks, and patents. The market has also recognized the value of intangible assets like ESG practices themselves. In turn, that has translated into a shift in the ways that companies are valued, Saul said.
ESG growth is also a function of just how large corporations are now compared to governments, argues Saul. Sixty-nine of the top 100 economic entities in the world are corporations, not governments, according to a 2018 analysis by U.K.-based Global Justice Now.
“As a result, corporations have a huge influence — I would argue, more influence — over our daily lives than government does,” Saul said. “So we care about the impact they’re having…”
These trends have translated into increased institutional demand for ESG products.
But that doesn’t mean every product will be a winner. Over the next 18 months, institutional investors will be far more interested in ESG funds that depart from a broad format. Taylor and Collins argue that managers need to consider building products with a “sustainability ethos,” developing a clearly designated fund strategy that incorporates ESG values specific to their firms, and increasing transparency and disclosures about progress toward goals for regulators, clients, and employees.
The good news is that such a strategy may also help with recruitment.
“To attract and retain the better professionals, [the talent] has to feel like the firm takes sustainable investing seriously,” said George Wilbanks, an executive recruiter in asset and wealth management and founder of Wilbanks Partners.
Talent will gravitate toward — and stay at — the firms that disclose their ESG approaches and progress. Wilbanks said the most successful firms, in terms of retaining talent, will have a robust framework to determine which products truly qualify for the ESG label and an investment policy and process that reflects the firm’s distinct approach.
“That is a huge boost to your recruiting brand, when you do it right,” Wilbanks said.
Deloitte found that productivity and retention could improve for firms that reinforce their “vision and [build] camaraderie.” This includes being transparent about firm-wide ESG values.
“One solution may be for firm leadership to show a top-down commitment by tying executive compensation with meeting specific ESG targets,” Taylor and Collins wrote.
Asset managers can also differentiate themselves through ESG-aligned proxy voting.
“By ensuring the fund’s proxy votes align with the stated sustainability objective, managers can demonstrate genuine commitment to regulators and investors,” according to Taylor and Collins.