Environmental, social and governance (ESG) sits near the top of priority lists for many consumers, governments and businesses. As the world tries to encourage a more sustainable and fairer environment for everyone to benefit from, ESG factors have become crucial. ESG investing is starting to become a common sight in the world of wealth management, spurred on by incoming regulations and customer demand.
In fact, a report from Capital Group claimed that around 89% of investors considered ESG when making investment decisions. Similarly, 85% of asset managers see ESG as a major priority, an Index Industry Association report indicates. As for regulations, governments around the world are increasingly focused on the space. Earlier this year, the International Sustainability Standards Board (ISSB) revealed two global sustainability disclosure standards. The UK’s government recently announced plans for a new standard that would mirror that outlined by the ISSB. This is just one of many developments happening around the world with ESG investing standards.
However, not everyone is on board with ESG investing. Republicans and Democrats are currently clashing across the US on rules around ESG investing, including an anti-ESG investing rule that was passed by the House of Representatives and then vetoed by President Biden. This division on ESG investing has led to a complex regulatory landscape in the US with states having very different rules on the practice.
But why should wealth and asset managers be interested in ESG investing? Well according to Fredrik Davéus, the CEO and co-founder of financial analytics API developer Kidbrooke, “One of the most important human challenges to date is climate change and how to manage and mitigate it. Hence it should be top of mind, and Wealth Managers should take care not to greenwash but promote actual good outcomes with regards to ESG.”
Echoing this, Hari Menon, partner and SVP at IntellectAI said, “Wealth management firms should be interested in ESG for their own existence and survival. It is no longer an optional or ‘nice to have’ metric but a fundamental and critical metric.”
How WealthTech has transformed ESG Investing
WealthTech has opened the investing market to the masses. While investing was once seen as something exclusive to the wealthy, WealthTech has now democratized the process, allowing consumers to invest as per their capacity. Not only has WealthTech opened up the retail investing space to more people but given greater access to ESG-based portfolios.
Hari said, “WealthTech has transformed the ESG landscape by bringing it to the attention of every client and investor and making it more visible. This has changed the urgency around the whole thing and has forced asset managers and wealth managers to do more about it.”
Betterment, Ellevest and Wealthfront are just a handful of WealthTechs that are empowering retail investors to put their money into companies that share their values. Given the interest from investors into ESG, traditional wealth firms are following suit and providing clients with these portfolio types.
One way Davéus believes WealthTech has transformed ESG investing is through additional data points. He said, “There is more data available now than earlier, but still more innovation needs to happen when it comes to use cases and how the data is used and communicated.”
Data challenges
Data is a backbone of wealth management and firms need to ensure they have authentic and accurate data. This is particularly the case for ESG data. Without having clear and accurate data, a firm might miscalculate a company’s climate impact or potentially miss third-parties or companies in the supply chain that would impact a portfolio companies ESG rating.
To ensure that a wealth manager can get the best ESG data for their investment decisions Davéus and Hari, both agree it comes down to the data partner. Hari said, “Wealth managers will need to pick the right data partner who can provide explainable ESG insights with a high level of accuracy. They should not just work with Blackbox scores or ratings.”
Further to this, Davéus added, “Analytics partners are increasingly relevant since you need to make sense of the data and present it in an understandable and effective way.”
Aside from data, Hari also noted that balancing financial returns and responsible investing is probably the biggest challenge faced by wealth managers. The financial market is struggling around the world, forcing many companies to focus on survival, which often involves reducing focus on areas like ESG. A report from Bloomberg in 2022 claimed that 80% of CEOs expect to reduce their ESG efforts over the following 12 months. Similarly, a wealth manager might consider seeking better financial returns at the expense of responsible investing. However, given the rising regulations and customer demands, prioritizing short-term returns over responsible investing may not be the best decision.
Hari believes WealthTech can play an important role in helping firms find the right balance between returns and responsible investing. He said, “Using the right technology, leveraging the progressive AI landscape, and deep understanding of ESG impact should help WealthTech’s shape this correctly for the industry.”
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