One trend is transparency, as corporate issuers begin responding to regulatory and market demands for more disclosure on how they assess and manage ESG risks like climate change, with less reliance on third-party data providers. "Ultimately, the market will be absorbing a tremendous amount of information from issuers," Streur said.
Next comes using that information wisely when deciding where to invest, with more integration of financial analysis within the ESG analysis process.
"We hear a lot about materiality, the linkage between a company's ESG exposure and financial analysis. I think it's really going to be investment management companies as well as asset owners who do the work, developing specific research capabilities" that include verifying the information, Streur said. "The first thing that's needed is a detailed assessment of ESG exposure at a company level."
"Skills need to be developed, models need to be built and tested, and even greater information needs to flow. It's developmental," Streur said. He believes the combined efforts of investment managers and asset owners "ultimately will pull companies along. Companies do want standards so they know what they are doing and that it is something that the market will accept," he said.
So far, ESG disclosure has taken a circuitous route to standardization, with European regulators out of the gate early.
"In Europe, the last two to three years were dominated on the ESG front by the regulatory tsunami," said Eric Borremans, Geneva-based head of ESG at Pictet Asset Management, with $252 billion under management. The European Union's Sustainable Finance Disclosure Regulation "was the first piece of the jigsaw," with rules for money managers out before ones covering companies.
"We still are in the situation where data we are supposed to gather for clients is missing, but it is improving," Borremans said.
Money managers will have to stay nimble as the European Commission now reviews its ESG reporting framework for them and considers introducing new sustainable fund labels.
There will also be more information to sort, as sustainable reporting rules for companies in Europe start going into effect in 2024. They will focus on double materiality, requiring companies to disclose how their sustainability-related risks and opportunities impact financial performance; and how the company impacts sustainability issues like climate or biodiversity.
With the U.K. expected to finalize a green taxonomy this year to mirror EU rules on ESG disclosure, and regulators in as many as 40 other jurisdictions on a similar path, "the challenge I think the industry faces going forward is the multiplication of green taxonomies," said Borremans. With some countries "happily including fossil fuels, what is considered a green investment in Asia or North America could be considered a brown investment" in Nordic countries. Money managers will keep stressing the value of global standards, but in the meantime clients "need to do their homework," he said.
Efforts by the U.S. Securities and Exchange Commission to dictate more corporate disclosure of ESG risks related to climate change and human capital management, and to prevent misleading fund names, will add to the regulatory mix.
"The regulatory symmetry question is something that is going to be key over the next few years," said David McNeil, head of responsible investment research at Insight Investment. In the meantime, "it's somewhat of a balancing act. We have to respond to client preferences, and we are seeing a lot more bespoke requests," he said. On social issues, those include requests for more negative screening, while on environmental issues clients are more comfortable with "dark green" strategies that have clear impacts, McNeil said.
Pratap Singh, senior director and head of private market services for fintech provider Acuity Knowledge Partners, sees the regulatory burden in private markets ramping up, with limited partners and potential buyers putting pressure on private fund managers to comply with ESG regulations.
In the U.S., politics have thrown sustainability-focused investors a few curves, with some states banning ESG considerations by public investors including pension funds.
A Cerulli Associates annual survey found even more U.S. asset owners considering politics the greatest challenge to ESG decisions — 75% compared to 62% last year — while asset managers were already feeling the pressure.
Still, ESG integration from a financial materiality perspective is gaining ground in the U.S., said McNeil with Insight Investment. "There is a lot more work for us to demonstrate that," he said.
Investors are hoping for some help comparing companies on ESG and financial materiality, if and when voluntary global sustainability disclosure standards released in June by the International Sustainability Standards Board are adopted by local jurisdictions.
"ISSB is actually providing a baseline for investors and directors to deliver decision-useful information to investment committees and corporate boards," said Richard Manley, chief sustainability officer for the Canada Pension Plan Investment Board, Toronto, managing the assets of the C$575 billion ($421.6 billion) Canada Pension Plan.
"Increasingly, the value is in the ability to ask the right questions. Today, I think we are asking the right questions," said Manley, who believes that capital market innovations "will be moving us toward capital markets that emphasize sustainability."
As the 2050 target set by many asset owners to transition investment portfolios to net-zero emissions looms ever closer, climate change and how companies manage it will continue to top the list of ESG priorities.
With increasing pressure from regulators and investors for companies to have credible transition plans that are focused on clean energy, that means "a huge amount of capex going into energy systems," said Stephanie Maier, global head of sustainable and impact investment for GAM Investments in London.
Between policy, regulation and increased corporate commitments, "institutional investors are seeking to tap directly into market tailwinds for companies that are leaders in or enablers of transition," said Marina Severinovsky, head of sustainability, North America for Schroders, with $923.1 billion under management.
Money managers will also be spending more bandwidth on biodiversity, spurred by the September launch of a global framework for companies to manage and disclose nature-related risks from the Taskforce on Nature-related Financial Disclosures.
Considered the biodiversity counterpart to universally recognized financial disclosure standards for climate, "we are expecting good overall adoption," said Ingrid Kukuljan, head of impact investing for Federated Hermes. "Asset managers across the board need to start analyzing the nature-related impacts and dependencies of their investments and assessing the approach of corporates. Considering the systemic risks it poses to the global economy, we believe that minimizing biodiversity loss should become part of fiduciary duty commitments."
Members of the investor initiative Nature Action 100 — 190 institutional investors with a collective $23.6 trillion in assets — are now engaging with 100 companies in key sectors to drive corporate action on nature and biodiversity loss.
ESG and its relation to financial materiality has clearly reached the boardroom, said Kris Pederson, Ernst & Young's Americas Center for Board Matters leader. A recent EY survey of board directors found that 66% believe their enterprises can only be resilient if they are environmentally sustainable, and an equal number agreed that addressing sociopolitical issues such as diversity and social justice builds trust with employees and customers. "I think we are going to see more focus on materiality," Pederson said. "Investors are clearing that path for them to think long term."
ESG materiality is also factoring more into companies' executive compensation decisions, said Brian Bueno, ESG leader for corporate governance consultant Farient Advisors.
Some may drop ESG terminology to sidestep political pushback, but there is more quantification and objectivity going into compensation decisions, he said, and "as they disclose more data, there is more pressure to show progress."