Fully integrating a robust ESG approach can be a steep learning curve. As interest in ESG increases, both regulatory pressure and investor expectations can change quickly.
Fund managers would do well to be prepared and get ahead of these needs. A few key pointers are discussed briefly below.
ESG means different things to different people
The financial world typically runs on hard, quantitative numbers. However, ESG’s roots are much more qualitative. Your investors may have drastically different philosophies surrounding ESG: for example, some may heavily favor investing in firms with already very low to no carbon emissions, while others may wish to invest in high-polluting companies that are on a path to transform their business to greatly reduce their overall carbon emissions.
Having a good sense of your investors’ ESG interpretation is a prerequisite to developing your own approach.
Articulate what ESG means to you
While it is imperative that your individual funds meet your investors’ investment requirements, many individuals and institutions allocating to your firm also wish that your firm is proactively thinking about ESG at the management company level. An ideal scenario is one where the investor's ESG philosophy, the firm’s philosophy and the fund manager’s personal philosophy all overlap.
Develop a repeatable, measurable process
As some ESG-related metrics are tougher to capture than legacy criteria, firms must have a purposeful approach to data collection, aggregation and reporting. There are a dizzying number of available ESG data sources as well as many different ways of matching, normalizing and interpreting this data—all of which can muddy the implementation of your firm’s ESG strategy.
Your ESG policy should include a process that can confidently point to measurable outcomes, and that process should be repeatable. Institutionalizing the implementation of your ESG strategy will inspire confidence in your investors relative to less effective approaches based on vague notions, limited datasets and inconsistent reporting.