Will investor ESG demand make the industry truly compliant?


While regulations, such as SFDR in Europe, create certain disclosure and reporting requirements for asset managers, the substance and requirement for them to effectively consider ESG factors remains primarily investor. As such any investment’s environmental, social and governance (“ESG”) impact of investments has been, and will be, for the foreseeable future, an investor driven demand.   

By now most of us are familiar with the stats.  Interest in sustainable investing among the general population of investors jumped from 71% in 2015 to 85% in 2019, and in millennial investors from 84% in 2015 to 95% in 2019, according to Morgan Stanley’s Institute for Sustainable Investing.  The pandemic (and the response to it) and Gen Z’s continued investment growth only furthers to the importance of ESG.  

The question we ask ourselves is whether broader investor demand will equate to the industry’s commitment to ESG and whether it will drive the requirement for more than general disclosure and a “check the box” exercise during ESG reviews. 

Further, everyone will need to understand the conundrum that ESG has created when it comes to the value of securities and how this should be managed. For example, stocks with high ESG scores, which otherwise may not be that attractive, are often ‘bid up’ substantially because of investor demand. However; would a prudent investor still buy these shares if not for the ESG demand?  Thus from an investment due diligence perspective this is a key point to review.

Laven has been fortunate enough to work with several pension funds, banks and investment managers, procuring operational and investment due diligence including on ESG, which reviewed, processes and revealed failures or genuine thought and care towards ESG. Laven has built a framework for assessments and ongoing reviews which goes beyond merely looking at ESG reports that ‘tick the box’.  

Partly due to this experience, and the data we have accumulated, we are optimistic that investor demand and actions will support the positive development of genuine and effective ESG practices. At Laven we envision a future where investors increasingly require “deep dives” into ESG controls, procedures, and requirements to allocate (and maintain) an investment.   

It is now the challenge for fund managers, and assets managers in general, to create authentic and substantive processes that, at a minimum, incorporate ESG as an important decision factor in an initial investment and in the evaluation of existing investments. This may prove to be even more relevant and possibly harder for private equity and venture capital fund managers which are currently experiencing high demand, and imposing  shortened due diligence reviews. As such they may lack the incentive to truly focus on ESG. Further they may also need to focus on the ESG policies at the level of their investments in corporates, but they may fall short here yet again, as they may lack board seats to influence the day-to-day management of a portfolio company.  All of these points merit to be checked.

Institutional, individual, retail, accredited, qualified the ball is in your court, to help brin about a better understanding and an even greater conviction towards ESG; and professional like us will continue to assist in not only pushing the message but procuring best practice standards.

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