Assets globally that are invested in accordance with environmental, social and governance (ESG) principles, or sustainable investments, have been growing 17% per year and now stand at $23 trillion according to McKinsey. The growth of US ESG assets in particular is up over 200% from the past decade according to JPMorgan. As institutional investor demand for ESG products mounts due to robust ESG performance and stakeholder pressure to address global challenges, banks and business schools alike should offer mandatory sustainable investing training to meet the demand for financial services professionals who understand sustainability. Naturally, this need for training also applies to impact investing, the smallest sustainable investing approach in terms of amount of capital deployed at 1% of total sustainable investment AUM according to the Global Impact Investing Network.
Reaching New Heights: Investor Demand for ESG Investment Products
The reasons for heightening investor interest in sustainable investing are manifold—this article will focus on two before moving on to constraints.
First, growing evidence of the relationship between corporate ESG performance and long-term financial performance is attracting investors to ESG products. This evidence ranges from practitioner and academic research to first-hand investment experience. For example, a recent BCG study showed that top ESG performers attained 3% to 19% higher valuation multiples than did median ESG performers. In addition, a recent Harvard Business School working paper concluded that even public sentiment momentum about a company’s sustainability activities affects the price that investors are willing to pay for sustainability. Moreover, 68% and 69% of asset owners believe that integrating ESG factors significantly increased returns and reduced volatility, correspondingly. Asset owners include pensions, insurance companies, sovereign wealth funds, and endowments and foundations.
Second, stakeholders are more likely to pressure institutional investors to address global challenges, such as the UN’s Sustainable Development Goals (SDGs) and climate change. To illustrate, a broadening array of stewardship codes (Canada, Brazil, Malaysia, and South Africa, inter alia) call for asset owners and asset managers to integrate ESG factors. Similarly, the Asset Owners Disclosure Project highlights investors’ management of climate-related risks and drives change through advocacy. Asset owners, in turn, request ESG products from asset managers. As a result, asset managers have responded by hiring dedicated ESG specialists to help integrate ESG factors into existing investment processes and products and launch new ESG-specific products.
As Easy as ESG: How Banks and Business Schools Can Meet Investor Demand
While more than a quarter of professionally managed AUM integrate ESG factors, over three-quarters of institutional asset owners feel responsible to invest sustainably according to Morgan Stanley. “To [capitalize on the opportunity that this gap represents and] scale sustainable investing, banks should expand sustainability training,” explains Yana Kakar, Global Managing Partner of development consultancy Dalberg Advisors. Specifically, banks should train industry-focused investment bankers, institutional salespeople, and high net worth relationship managers.