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Portfolio > Portfolio Construction > ESG

CFAs Going Harder on Sustainable Investing

By Michael S. Fischer

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Eighty-five percent of CFA Institute members in a recent study say they take environmental, social and/or governance factors into account when investing, well above the 73% who said this three years ago.

Related: ESG Investing: Not Just for ‘Tree Huggers’ Anymore

The report says client demand has driven this growth, with 76% of institutional and 69% of retail investors having an interest in ESG investing.

More than 7,000 industry participants took part in the study, including some 4,400 industry clients, 2,800 investment practitioners and 250 participants from 31 markets in 27 virtual roundtables and interviews.

The report says three things account for sustainable investing going further than its forerunners:

  • It’s additive to investment theory and doesn’t mean a rejection of foundational concepts.
  • It develops deeper insights into how value will be created going forward using ESG considerations.
  • It considers many stakeholders.

“Incorporating sustainability in investment management has become part of our industry’s mission to serve society by improving long-term outcomes,” Margaret Franklin, president and chief executive of CFA Institute, said in a statement.

“This moment represents a valuable opportunity for organizations to address this challenge and help shape a future worth investing in. As the focus on sustainability in investing gathers increasing momentum, it will eventually dictate the sustainability of investing itself.”

Related: How Biden’s Team Could Support Sustainable Investing

In addition to the study findings, the report focuses on four key areas of sustainable investing:

1. Alternative data.

The report says that with more data sources becoming available and more differentiation among data, technology is a necessary foundation for competitive advantage in ESG analysis.

Seven in 10 roundtable participants believed that the rise of alternative data would make sustainability analysis more robust. Three in five agreed that sustainability is an area where human judgement and active management will thrive, highlighting the often subjective and contextual nature of sustainability data, according to the CFA Institute.

2. Increased demand for sustainable investing expertise.

At present, there is a relative scarcity of sustainability talent in the investment industry. Using LinkedIn Talent Insights, CFA Institute found that the supply of expertise among core investment roles is limited but growing quickly. Of the 1 million investment professional profiles it examined, fewer than 8,000 listed ESG as an area of expertise.

However, researchers also found that this figure has increased by 26% in the last year. Meanwhile, a review of some 1,000 portfolio manager job posts on LinkedIn found that approximately 18% mentioned the desire for sustainability-related skills.

3. Investors demand new investment models and expanded product offerings.

The institute found that ESG integration and best-in-class approaches to incorporating ESG into the investment process are more popular than negative or exclusionary screening. This underscores the evolution of ESG techniques, enabled by improvements in data.

Future growth opportunities in the product space include ESG index tracking and quant funds, ESG thematic and multi-asset products, climate transition strategies, long-term engagement and better benchmarks.

4. Systems thinking in sustainability analysis.

The coronavirus pandemic has spotlighted the urgency of sustainability issues, highlighting the interconnectedness of the financial system and how corporate value creation both affects, and is affected by, the ecosystem in which it operates.

The integration of sustainability issues will require a more widespread application of system-level thinking, the report said.

“The demand for sustainable investing continues unabated, driven by push and pull factors, catalyzed by societal expectations and accelerated by the COVID-19 pandemic,” Rhodri Preece, senior head of industry research for the CFA Institute, said in the statement.

“Investment firms that incorporate sustainability into their business models need access to specialist knowledge to enrich their investment capabilities and to bridge the data gaps. Education and training in the ESG space, along with the rise of alternative data sources and enhanced disclosure frameworks, will equip firms to deliver on the potential of sustainable investing.”

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Michael S. Fischer

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