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Nov 26, 2019

Many investors link ESG to fiduciary responsibility, SSGA finds

More talent needed to help investors integrate ESG into their processes, Rakhi Kumar says

Almost half (46 percent) of investors surveyed by State Street Global Advisors (SSGA) believe considering ESG is part of their fiduciary duty, according to a new report from the asset manager.

Rakhi Kumar, head of ESG investments and asset stewardship at SSGA, says investor perception of ESG as a fiduciary duty is a positive step, but presents challenges. ‘We’ve seen how ESG started from an SRI perspective,’ she says. ‘Now it’s going mainstream because it’s not just a values aspect – there is a value driver. It’s clear there is a financial advantage.’

The challenge for investors looking to integrate ESG into their processes is that there is a personnel gap, according to Kumar. Ninety-four percent of survey respondents plan to hire more ESG specialists over the next three years, according to the report.

‘A lot of education is needed and teams are still being built,’ Kumar says. ‘But integration will require the education of existing staff.’

According to the report, 44 percent of respondents say their firm has no one whose main job is currently to focus on ESG investing. Thirty-seven percent say they have one person now, 54 percent say they will have one person in three years’ time, 8 percent say they have more than two people now, and 40 percent say they will have two or more in three years’ time.

Kumar says a global framework is needed for data, as there is no standardized reporting for ESG at the moment. Forty-four percent of respondents cite a lack of reliable ESG data as the top inhibitor of ESG adoption. SSGA launched its own proprietary ESG data system – called R Factor – earlier this year, which uses the Sustainability Accounting Standards Boards’ materiality framework.

Kumar adds that companies need to come together to figure out a standard for reporting ESG financial material relevant to investors along the lines of FASB.

‘ESG means different things to different people,’ she explains. ‘This is a very fast-moving area, and what is challenging is that we don’t have the basics established. We are building on a soft foundation. With ESG, we are often running before we can walk. We need to establish a foundation and a common understanding.

‘Right now, making investments ESG-aware is important and it is going to become more so. Everybody is going to do it differently and it’s going to feel like the Wild West if we don’t get a common framework.’

Investors currently rely on asset managers to inform their decision-making regarding ESG. They are looking for educational materials, insights and guidance to help them understand ESG, Kumar says. They are asking for data relevant to ESG and they expect fund managers to have a point of view on ESG and be able to communicate that point of view.

Kumar says that as ESG evolves, we might start to see it take different forms in different regions. ‘I think Europe is taking the lead in establishing the rules of the road for ESG,’ she comments. ‘The regulators are being far more involved and establishing the global pathways for the rest of the world to follow.’

She notes that while regulation is driving ESG evolution in Europe, in the US it is being viewed more from a financial angle. Earlier this year the SEC indicated that it was not planning to announce ESG reporting requirements for US companies in the near future.

In North America, ESG is commonly viewed through the lens of materiality, rather than the lens of social responsibility.