Embracing environmental, social and governance (ESG) is now firmly ensconced within the agendas of institutional investors and asset managers. While some investors considered ESG as little more than a tick-box exercise a few years ago, it has now become a deal-breaker, and regulations have played a key role in this.

In fact, complying with regulatory development has been one of the main drivers in embracing ESG, according to a Barnett Waddingham survey conducted among pension funds and asset owners.

The survey shows that 91% of respondents say evolving regulation and legal requirements are a key factor in why they take into account ESG considerations in their investment decision-making and implementation. Other reasons include managing risk (77%), adviser recommendations (57%), demand from members, beneficiaries and policymakers (28%) and peer influences (17%).

ESG is about more than following regulations

However, the report states that “regulation isn't a blueprint for running a successful pension scheme, trust or endowment. Those who embrace the opportunities from ESG as well as those who effectively manage risks and integrate sustainability considerations into their investment thinking should be well placed for the transition to a low-carbon economy.”

Data from the Barnett Waddingham survey also shows that new regulations encourage investors to make changes in their portfolios.

More specifically, about 48% of the respondents say that recommendations from their advisers encourage them to make a significant shift in their investments (48%), followed by new regulations (42%). Other indicators include scientific evidence on the impacts of climate change (7%) and government guidance (3%).

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Mapping the ESG reporting race

The interest around embracing ESG has led to a higher number of ESG regulations and standards being launched globally. More specifically, a report from the professional services company EY shows that the number of ESG regulations and standards across the world has almost doubled over the past five years, with 348 mandatory and 266 voluntary provisions in 2020, up from a respective 266 and 135 in 2015.

Thus, there are more than 600 ESG reporting provisions globally, with many having differing interpretations of sustainability.

The EY report reveals that Europe had the highest number of ESG reporting provisions in 2020 on a regional basis, both in terms of mandatory and voluntary provisions. Asia-Pacific was second, followed by Africa and the Middle East, South America and North America.

ESG regulation will shape the asset management world

Regulation related to ESG is set to play a significant role in shaping the asset management industry by having a key impact on investors’ disclosures and strategy.

Some 66% of asset owners and asset managers believe that policymakers will increase their requirements on ESG disclosure over the next 12 months, according to the ESG Global Survey 2021, conducted by the French bank BNP Paribas.

The survey also reveals that 66% of asset managers and 64% of asset owners believe that regulation is likely to accelerate and deepen their organisation’s ESG strategy.

The data also shows that a higher percentage of asset managers (66%) than asset owners (61%) agree that the increased regulation will drive up costs.

Around 50% of the investors in the survey agree that they cannot wait for regulations to take action on urgent ESG issues such as climate change. In addition, only 40% of asset managers agree that their organisation is taking a greater role in regulatory/government consultations on ESG.

Only a very small percentage of investors (17%) say that regulation is not likely to have an impact on their ESG investment strategy. This highlights that the great majority of investors believe that regulation is set to play a key role in their ESG investment strategy.

The outbreak of the Covid-19 pandemic has been a game changer for investors around the globe and has brought into clear focus how embracing ESG can future-proof their portfolios. Establishing ESG standards is also significant in terms of increasing transparency, although the multiple frameworks around the world make it harder to achieve consistency in reporting across all companies. This is why there is a need for a standardised and recognised measurement system, which would help investors to further embrace all areas of ESG.