What is the Impact of ESG on Investment Management Outsourcing?

As the public becomes more aware of the role large corporations play in various social issues, environmental, social, and governance or ESG’s impact on investment management is emerging to be a substantial factor. Statista estimates the value of ESG assets worldwide in 2023 to be worth USD 403 billion, proving that it is not something to be ignored.

Given the popularity of ESG investing among investors, it is worth learning what it is and its impact on investments and investment management outsourcing. We’ll also discuss how BPO solutions can help fund managers navigate ESG.

What is ESG?

ESG stands for environmental, social, and governance investing. ESG investing is used to decide where to invest by looking into a company’s corporate policies concerning environmental, social, and governance factors.

In other words, ESG investing is when investors choose to invest in companies that engage in sustainable and ethical business practices. This approach is based on the principle that ESG ratings provide a transparent view of an organization’s operational performance and how they navigate various types of risks related to the environment, society, and corporate governance.

ESG gives an insight into companies’ long-term resilience when incorporated into investment processes and decision-making by incorporating ESG data into risk assessments, engaging with investee companies, taking into account the impact of investments on ESG, and disclosing ESG information to investors and regulators. These practices enable investors to make smart investment decisions.

ESG Factors

To help investors make investment decisions, companies receive ESG ratings. ESG ratings are available online via brokerage platforms, financial portals, and rating agencies. Companies may also assign themselves a score through an internal scoring process.

ESG ratings evaluate companies’ performance on three main criteria:

Environmental

ESG takes into account how companies manage their environmental impact, which includes their policies and initiatives. This criterion considers:

• Green energy initiatives
• Efforts to lower greenhouse gas emissions and CO2 footprint
• Efforts to reduce harmful air and water pollutants and chemicals
• Efforts to combat deforestation
• Waste management

Social

Social in ESG is concerned with an organization’s stance on human rights issues and whether they apply these to their own processes and systems. Important social issues that ESG investors should consider are:

• Diversity and Inclusivity
• Labor standards
• Ethical supply chains
• Data protection
• Policies regarding sexual misconduct
• Working conditions

Governance

This criterion is concerned with a company’s leadership, transparency, and accountability systems. It investigates their procedures and practices, which reveals their risk for lawsuits and other sanctions. These include:

• Transparency and accountability policies
• Lobbying
• Internal Corruption
• Diversity on the board of directors
• Executive pay
• Political contributions
• Large-scale lawsuits
• Shareholder rights

These ESG factors help investors evaluate a company’s long-term sustainability and its potential for financial returns. By engaging in sustainable and ethical business practices, ESG-oriented companies minimize various types of risk, which increases their potential for future market success.

The Role of ESG in Investment Decisions

One of the main reasons for the emergence of ESG investment is the investors’ increased desire to align their investment portfolios with their values. Investors with such an approach argue that by investing in ESG-oriented companies, they are encouraging other companies to engage in ethical and sustainable practices.

More than that, however, the impact of ESG on investment management is based on ESG factors’ ability to identify potentially risky investments.

A company with a poor rating on governance factors presents a high risk for unethical practices like corruption. Cases of corporate corruption have a negative effect on a company’s reputation and finances. Corrupt executives may embezzle funds that should be invested in the company, thus affecting its financial performance.

In other cases, such as with the catastrophic scandal of Enron, executives may deceive investors into thinking they were performing well only for the company to declare bankruptcy causing stock values to plummet.

In contrast, ESG factors are also a critical measurement of a company’s future success by revealing how it navigates the changing needs of the market and various risks.

Thus, by considering ESG in investment decisions, investors and investment managers uncover companies that are resilient and capable of creating long-term value.

The Impact of ESG on Investment Management Outsourcing

Given the public’s awareness of environmental, social, and governance issues nowadays, ESG has become a crucial factor in the investment process.

Financial management companies may experience numerous benefits from incorporating ESG into their practice. Many investors may gravitate toward fund managers who incorporate ESG factors into investment processes.

An ESG-oriented approach may help fund managers establish a more accurate assessment of an investment’s future market success and steer their clients toward stronger portfolios. It can help improve an asset management company’s reputation among clients and society in general.

While ESG’s impact on investment management is full of potential, it comes with additional considerations affecting the decision-making and investment process.

In incorporating ESG factors into their investment strategy, fund managers need to navigate the technicalities of ESG-integrated portfolio management, which requires them to depart from traditional investment methodologies. Apart from thinking in the long term, fund managers can no longer simply consider fiscal performance and financial returns as the sole goal of investments, but also consider ESG factors as equally important. Fund managers need to look beyond a company’s financial performance and into subjective elements – environmental, social, and governance. Fund managers bear the added responsibility of acquiring data about ESG factors and evaluating them before deciding on an investment.

Business Intelligence (BI) technology can ease the process of collecting, integrating, and analyzing data and then generating actionable dashboards. Financial analytics and predictive models can assist in the decision-making process by eliminating repetitive tasks.

Another impact of ESG on investment management is the new ESG reporting frameworks and standards. Companies who wish to be considered ESG-oriented must meet these standards and follow reporting frameworks. Naturally, this comes with the responsibility of providing data to prove their compliance with regulations. They risk being accused of “greenwashing” without data to back them up.

However, finance services companies can achieve compliance with ESG standards and demonstrate their commitment to ESG principles by outsourcing investment management services. Asset management companies can delegate low-value tasks so they can focus on sustainability and incorporating ESG into investment processes.

The Role of Investment Management Outsourcing in ESG

With ESG reporting frameworks and standards in place, fund managers and financial advisors also need to understand these reports and incorporate them into their financial analyses.

While ESG can help discern sound investments, it does add to the workload of fund managers and financial advisors. Evaluating ESG factors is no work in the park, especially when fund managers also need to consider the individual values and priorities of each client.

Investment management outsourcing can help fund managers and financial advisors take full advantage of ESG investing. A BPO partner can handle time-consuming manual tasks like data gathering and integration, financial analytics, and fund administration and accounting so fund managers can focus on high-value functions like building a relationship with clients and tailoring the approach to their expectations.

An outsourced investment management partner can provide comprehensive middle- and back-office support for financial services companies. Services include automation technology and a team of industry experts to improve work efficiency and reduce risk from human errors.

With Infinit-O, it can be easier to manage ESG while allowing your fund managers and financial advisors to spend more time on understanding the important social issues that ESG investors should consider and tailoring their investment strategies for each client.

ESG can become your company’s competitive advantage and be the key to attracting new clients and expanding your practice.

The Future of Investment Management Outsourcing

The emergence of ESG investing hoisted a paradigm shift in investments, from having completely monetary priorities to being concerned with societal impact. With such a profound shift, we can expect the ESG to have the same profound impact on investment management.

Just as ESG measures a company’s ability to adapt to changing economic and societal conditions, asset managers also need to be resilient and adaptable to investors’ needs. A business process outsourcing company like Infinit-O can support your organization in navigating ESG investing and guiding your investors toward smart investments.

Welcome the future of investing through ESG investing with Infinit-O. Send us a message and let’s talk about how we can help you as your BPO partner.

Infinit-O is the trusted customer-centric and sustainable leader in Business Process Optimization to Small and Medium businesses in the Financial Services, Healthcare and Technology sectors by delivering continuous improvement through technology, data and people.

For more information, visit: www.infinit-o.com