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A new NAB report offers insights into how asset managers are incorporating sustainability metrics into their investing activities and what companies can do to develop best-in-class strategies.
Rapid shifts in societal expectations have helped the exponential rise in environmental, social and governance (ESG) investing seen around the world in recent years.
As the commitment to net zero reaches a critical mass among investors, the growing demand for high ESG-rated investments is changing the cost and availability of equity for companies.
Katherine Todd is NAB’s Head of Origination, Resources, Infrastructure & Government, and lead author of a new report investigating how asset managers are incorporating ESG factors into their investment activities and what companies can do to respond well to the changes in the investing landscape.
“It’s a bit like an exam,” Todd says. “If you don’t submit the exam you’re not going to get credit for it. Having a clear ESG strategy in place and providing the right data means asset managers can understand what you are doing and credit you for this.”
She says the first steps are to understand what your key investors want on ESG and what best-practice reporting looks like for your industry. While companies should naturally be aiming for the top, ahead of their peers, they certainly need to avoid falling into the bottom quartile and risk having their holding reduced by investors.
The NAB report, ‘ESG and Capital’, details how asset managers are using both ESG integration and screening in their decision-making and what industry-specific benchmarks they use from global standards bodies. More than 90% of asset managers are using both integration and screening in some part of their portfolios today, the report finds.
To navigate this environment, the report suggests industry leaders work to develop a board-approved ESG strategy with clear priorities, drivers and metrics to inform their company’s activities and sustainability reporting.
“Asset managers really like to see activities which support broader company goals,” Todd says. “An ESG strategy shouldn’t be unrelated to company strategy and sit off on the side.”
Consistency in reporting is also key when providing relevant disclosures from trusted data sources, as well as adding to these measures as your capabilities improve.
“Many large heavy emitters have excellent ESG strategies in place, compared to low emitting companies,” Todd says. “Once you get outside that top 100 [emitters] it’s about companies committing to undertaking the actions that will ensure they can position well with asset managers.”
Even for companies without a clear ESG strategy in place, the key elements may already be there to be leveraged.
“Strong governance goes a really long way – that’s a foundation,” Todd says. “Some companies will already have strong environmental and social metrics measured before ever putting together an ESG strategy – especially if they have good governance.
“What companies can find surprising is the level of change, the level of commitment, the level of adoption of ESG by asset managers and how seriously they are starting to take it.”
The report says more than three-quarters of the US$130 trillion of assets under management (AUM) globally are linked to managers signed up to key ESG commitments. For instance, more than $43 trillion of AUM today includes managers signed up to an initiative supporting the goal of net zero emissions by 2050 or sooner, the report says.
The trends identified in the report suggest that by 2030, ESG funds and mandates may represent up to 95% of total institutional AUM. The report also says there is a strong belief among companies that the positive link between a company’s ESG performance and cost of equity will continue to grow into the future – particularly for high-emitting sectors.
Todd says aligning stakeholders around ESG is similar to introducing anything new or complex: it needs education and engagement to address any concerns.
“ESG more generally is just really valuable for companies,” she says. “There’s no downside and a huge upside for getting ESG right. It’s a ‘no regrets’ activity putting in place good strategy, good priorities, tracking and measuring them.”
Once in place, it’s then a process of continual assessment to remain sensitive to emerging trends, evolving industry standards, technologies and data requirements.
“Having a good ESG strategy, priorities, metrics and reporting in place means asset managers can understand what you’re doing and why you are doing it – that’s the key.
“It’s a real positive to have a strong foundation to an ESG strategy that remains stable despite all of the changes going on in the marketplace,” Todd concludes.
The ESG and Capital report is part of NAB’s Bank for Transition series. Part one which focuses on equity is available now, to be followed by a second report on debt soon.
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