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ESG incorporation on upswing for CAIA members, but many challenges remain — report

Environmental, social and governance investing is important to the alternative investment management industry, and it will continue to be important, although incorporation challenges remain, a joint survey from the Chartered Alternative Investment Analyst Association and private equity manager Adveq shows.

Seventy-seven percent of 647 CAIA members surveyed — including asset owners, asset managers and consultants — said ESG investing is more important now than it was three years ago, and 78% predicted ESG investing will be more important three years from now than it is today.

However, only 52% of asset owners and managers surveyed said they now incorporate ESG factors into their investment decisions, with ethical principles, constituents' demands and business opportunities driving their incorporation.

An “increased microscope” is being placed on investors, said Lee A. Gardella, managing director and head of risk management at Adveq, in a telephone interview. People are asking how these asset pools are making money, Mr. Gardella said.

“The tide on ESG (investing) has clearly come in, and (we) don't see it going back out again,” added William J. Kelly, CEO of the CAIA Association, in the same interview. “A lot of people are figuring out how to get in the water.”

Holding some investors back, particularly in the U.S., Mr. Kelly believes, is the emphasis on short-term earnings, along with the low funding levels at some public pension funds where officials might feel they can't afford the long-term play that is responsible investing.

“This is a long-term play,” Mr. Kelly said.

According to survey respondents, the biggest hurdles to ESG incorporation are a lack of standardized, comparable data on material sustainability issues (cited by 69% of respondents); managing varied constituency requirements (44%); finding suitable investments (44%); and a lack of ESG-dedicated resources (42%).

To improve ESG pickup, clearer industry standards, more pressure from institutional investors and positive investment return outcomes are needed, said 71%, 67% and 64% of survey respondents, respectively.

Among the survey's other findings:

  • 74% of survey respondents said greater education on ESG investing is necessary; only 60% of respondents said they believe asset managers have a very clear or somewhat clear understanding of ESG investing, and 46% believe asset owners have a very clear or somewhat clear understanding.
  • To improve education, 52% of respondents said they plan to provide education in-house, and 22% said an industry solution is necessary.
  • 32% of asset managers and asset owners said they will say “no” to an investment based solely on responsible investing principles.

CAIA and Adveq surveyed 647 CAIA members, which included 121 asset owners, 344 money managers and 179 consultants, in January.