With just a quick scan of today’s headlines, it’s not hard to see that ESG is on the minds of investors. But, just because it’s a trending topic doesn’t mean the calls-to-action are clear. Is ESG a buzzword, or can it make a real concrete difference? Or, perhaps it’s already quickly evolved to the point of becoming a “due course of business” that’s already naturally embedding itself into stock valuations, like a recent article from CNN describes.
Regardless, one thing is crystal clear: there is no established ESG playbook to follow. But, new sources of data are becoming available and common features of ESG programs are beginning to crystallize.
The ESG Inflection Point
Consumer demand, regulation, innovation, and the media are all forces amplifying the noise around ESG. Even through the lens of global online searches, a clear inflection point is visible in the last two to three years, when interest in ESG topics took off in rapid upward trajectory.
Even as the rate of new investments overall have recently been falling, the inflows into sustainable funds are rising. As noted by consulting firm McKinsey, the ESG influx rose from $5 billion in 2018 to more than $50 billion in 2020—and then to nearly $70 billion in 2021. Sustainable funds gained $87 billion of net new money in the first quarter of 2022, though they have slowed since then.
Across industries, geographies, and company sizes, organizations have been allocating more resources toward improving ESG. McKinsey reports that more than 90 percent of S&P 500 companies now publish ESG reports in some form. But in alternatives investing, the more unstructured data environment makes ESG reporting and measurement a much trickier landscape to navigate.
7 Steps to ESG Success for Alternative Investors
Against a backdrop where Deutsche Bank, Bloomberg, and PWC are similarly projecting ESG assets to exceed $100 trillion in five years, when Dynamo surveyed a global audience of emerging managers in March 2023, 43% expected investors to increase their ESG and DEI reporting expectations over the next 12 months.
To meet rising ESG expectations, investment firms of all sizes are now prioritizing the implementation of structured ESG programs. Regardless of size, there are common features that underpin a solid program. Let’s look at seven key steps that form the building blocks of a meaningful and successful ESG program.
- Assign owners. A person, a team, or multiple teams – depending on firm size – must have ownership of data collection and a structured means of gathering data within specific time cycles.
- Know your obligations. Understand your regulatory, legal, and investor obligations.
- Build a question bank. Start with a default list of questions that captures the specific phrasing required and build from there.
- Make it easy. How can you make data collection easier for portfolio members? Instead of email, can you implement simple surveys with information pre-filled where possible.
- To avoid getting surveys returned with a lot of unanswered questions, think about ways to incentivize participation, such as a scoring system that rewards points for each completed answer, or sharing benchmarks about performance against peers.
- ESG calculations are often multi-layered, and though most are accustomed to this for fund reporting on revenue metrics, it is often easily forgotten for ESG reporting. Follow best practices such as normalizing data at the company level, aggregating at the fund level based on ownership, and converting to different units based on audiences.
- Create reporting outputs. Share the results of your ESG program through formal disclosure documents, annual reports, case studies, trend analysis, and maintaining a database of answers that help you respond quickly and consistently to investor queries.
Learn More About Building a Successful ESG Program
If you’re like many investors, you may have more ESG questions than answers. For a real-world perspective on ESG strategies, frameworks, and KPIs, watch the on-demand recording of our webinar with Dynamo’s in-house ESG subject matter expert Danielle Pepin.