Morgan Stanley
  • Institute for Sustainable Investing
  • Dec 1, 2022

Three Ways Asset Managers Can Help Meet Asset Owners’ Sustainability Demands

Sustainable investing market growth could accelerate with better alignment between investor expectations and asset managers’ ESG practices, products and reporting.

Asset managers have an opportunity to better align their sustainable investing1 practices, product offerings and reporting with asset owners’ demands, according to new research from Morgan Stanley. A survey by the Morgan Stanley Institute for Sustainable Investing polled 110 asset owners2 in North America, Europe and Asia, as well as 201 asset managers across the same regions, to understand what asset owners want and what asset managers3 are offering—and, most important, where the gaps lie in delivering environmental, social and governance (ESG) solutions.

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Sustainable Signals 2022

What are institutional investors saying about sustainable investing?

A survey by the Morgan Stanley Institute for Sustainable Investing

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Asset managers and asset owners continue to embrace sustainable investing…

with interest increasing across the world.

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77% of institutional investors reported seeing an increased interest in sustainable investing since May 2020.

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What is Accelerating or Advancing Sustainable Investing Practices?

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For asset managers globally:

·         62% say client demand/investor pressure

·         50% say public sentiment

·         48% say regulatory developments

·         37% say market performance

·         36% say COVID-19 pandemic

·         15% say scientific developments

Asset managers say that client demand and investor pressure are their biggest driver of growth…

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For asset owners globally:

·         52% say public sentiment

·         43% say client demand/investor pressure

·         42% say regulatory developments

·         28% say market performance

·         23% say scientific developments

·         20% say COVID-19 pandemic

…yet asset owners cite public sentiment as their biggest driver.

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Three Opportunities for Asset Managers to Meet Investor Demands for Sustainable Investing

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#1: Adopt the sustainable investing practices that asset owners are prioritizing

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The biggest opportunities are for more asset managers to report ESG performance (49% gap) and have dedicated ESG teams or resources (35% gap).

 

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#2: Develop product offerings that match investors’ ESG priorities

 

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Investors are showing an increasing focus on water solutions and climate change, and asset owners have an opportunity to better meet that demand.

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#3: Provide the data and metrics asset owners want to see

 

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Asset owners want to see more climate risk related data.

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What’s Ahead?

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90% of asset managers anticipate sustainable investing growing at their firm

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For EMEA and North American firms, that growth is in standardized products

·         EMEA: 75%

·         North America: 62%

·         APAC: 36%

While APAC asset managers see the most potential in customized portfolios:

·         EMEA: 42%

·         North America: 40%

·         APAC: 68%

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Yet hurdles remain for boosting sustainable investing market growth:

20% of institutional investors say they have adequate data to effectively measure their environmental and social impact

81% agree that more standardization around corporate ESG disclosures is needed to help improve sustainability data

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Institutional investors are also facing a talent gap:

Just 29% of asset managers and 23% of asset owners say their sustainable investing talent needs are being met.

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Sustainable investing remains an important focus area for institutional investors…

…but there is still an opportunity for asset managers to better align their sustainable investment practices, products and reporting with asset owner expectations to boost market growth opportunities.

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To learn more, visit: www.morganstanley.com/Signals2022

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Disclosures, Survey Methodology, and Survey Definitions

Though the macroeconomic environment and markets are volatile, sustainable investing continues to gain momentum. In the third quarter of 2022, sustainable funds returned to small net inflows, reflecting a more positive trend than the broader U.S. fund universe, which shed $86 billion during the same period.4 The Institute’s survey reinforces this view, with the vast majority of asset managers and owners (77%) reporting an increase in sustainable investing interest since May 2020, driven by pressures from clients and investors, shifting public sentiment and regulatory developments.

But there is still a disconnect between asset managers and asset owners, with three key areas for evolution, according to the survey:

What Asset Owners Want vs. What Asset Managers Provide

1. Sustainable Investing Practices & Policies

Asset management firms in Europe are outpacing their North America and Asia Pacific (APAC) peers in implementing a broad array of sustainable investing policies, according to the survey. Even so, more fund managers globally can capitalize on institutional investors’ demands for ESG reporting and disclosure, according to the Institute survey. Only 39% of asset managers report ESG impact alongside financial performance, despite 88% of asset owners saying they seek third-party managers that provide this information, a discrepancy of 49 percentage points.

There are hurdles when it comes to implementing these sustainable investing practices. While most asset managers and owners reported increasing their headcount of sustainable investing specialists between May 2020 and May 2022, they also said the talent pool is still not meeting their hiring demands, with just 39% of asset managers and 23% of asset owners finding enough qualified individuals to meet their organizations’ needs.

New products could meet asset owners' interest in water solutions and climate change investment themes

2. New and Expanded Sustainable Investing Products

Institutional investors also show growing demand for specific sustainable investing strategies focused on areas including water solutions, climate change and education. While fund managers agree that their top thematic investment priority is climate change, there is still opportunity for asset managers to create more products within and beyond climate change investing to meet increasing investor interest.

In terms of asset classes, public equities remain dominant for institutional investors, adopted by 66% of asset managers and 64% of asset owners. When it comes to fixed income, green bonds are a popular investment type, with one-half of asset managers and one-third of asset owners saying they currently invest in debt that funds projects earmarked for environmental impact.

Sustainable Investing Data Investors Want from Managers
Asset owners want asset managers to provide climate risk-related data

3. Sustainable Investing Data Investors Want from Managers

Within ESG disclosures, more fund managers could start providing data related to climate change. For example, 82% of asset owners said they want managers to provide carbon footprint data, but only 63% of asset managers surveyed offer this information. In addition, half of asset owners are looking for climate risk stress testing and scenario analysis data. While the provision of this information is central to recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD), fewer than one-third of asset managers stated that they provide these metrics to investors.

Similarly, when it comes to data, eight in 10 asset owners said they lack the ESG data to adequately measure their investments’ environmental and social impact. With more than half of institutional investors agreeing that sustainable investing loses credibility when investors can’t measure impact, addressing this challenge is essential to ensure continued market growth.

The Bottom Line: Takeaways for Fund Managers and Investors

There is an opportunity for more fund managers to adopt the sustainable investing practices being prioritized by asset owners, such as ESG disclosures, particularly those related to climate risks; thematic investing products in certain sustainability themes, especially water solutions and climate change; and planning and implementation of broader sustainable investing approaches. This is particularly important for APAC asset managers, who expressed the most interest in expanding their sustainable investing approaches and products in the next two years.

In addition, there is a pressing need to bridge gaps in ESG impact data and further develop global talent in the growing field of sustainable investing. Taken together, these actions can potentially boost the credibility and adoption of sustainable investing strategies among institutional investors across the globe.

1 Sustainable investing approaches defined: ESG Integration: Proactively considering ESG criteria alongside financial analysis; Restriction Screening: Exclusionary, negative or values-based screening of investments; Thematic Investing: Pursuing strategies that address sustainability trends such as clean energy, water, agriculture or community development; Impact Investing: Seeking to make investments that intentionally generate measurable positive social and/or environmental impact; Shareholder Engagement: Direct company engagement or activist approaches.

2 The survey polled asset owners that include but aren’t limited to insurers, pension funds, financial institutions, foundations, and endowment with at least $50 million in investable assets, with the largest cohort (42%) having more than $1 billion and less than $10 billion in investable assets.

3 The survey polled asset managers with investment products that include but aren’t limited to mutual funds, SMAs, real assets and index funds with at least $50 million in client assets, with a majority (72%) managing $100-$500 million in assets.

4 https://www.morningstar.co.uk/uk/news/227979/sustainable-inflows-slow-in-q3.aspx, November 3rd, 2022

Disclosures:

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