In conversation with Daniella Woolf, Danesmead ESG
Over the past decade, Environmental, Social and Governance (ESG) has become a new reality for asset managers and asset owners across the capital spectrum – from large investment funds to alternative asset managers and hedge funds.
As more firms look to develop ESG policies, marketers must keep up with the trends to ensure their firms stay compliant in an evolving regulatory environment. To better understand these trends, we spoke to London-based Daniella Woolf, the founder of Danesmead ESG, which offers bespoke ESG services for investment managers and allocators.
It’s time to shift the narrative, says Woolf. “ESG shouldn’t be seen as an issue; it’s an opportunity for the investment industry,” she says. “Investment managers are in the midst of a new reality and those that adapt are poised to thrive. On the flipside, there is a significant opportunity cost and risk for those that fail to approach ESG proactively.”
Here are five ESG trends that every marketer needs need be prepared for:
1. Get ready to up your disclosure game
What you say and how you say it are becoming more important for marketers when addressing ESG. Increasing disclosures, particularly climate-related disclosures, is already a significant theme in 2022. Global regulators are all moving towards harmonizing the disclosure rules for carbon calculations, reductions or carbon offsets. Their near-term focus is at the corporate level for larger publicly listed, carbon-emitting companies and asset managers who engage in public financial reporting. Still, Woolf expects the attention will increasingly shift to investment managers in a tiered approach over the next few years – a trend she has already observed in jurisdictions such as the UK.
The takeaway: Overall, regulators and the industry are attempting to develop a common language around what it means to be sustainable. We are seeing a global move to harmonize a classification system for companies and asset managers, leading to easier comparisons and more accountability. With better disclosures, it’ll be easier to spot laggards and overachievers, which is a very positive development. For marketers, it’ll be easier to communicate the value of ESG with a common framework that allows participants to compare apples to apples.
2. Greenwashing will be an important lens when scrutinizing marketing
As marketers, you know how important it is to be authentic in all communications. With ESG, adhering to that approach is now more critical than ever. With increased regulation comes increased regulatory scrutiny targeting greenwashing. Avoiding hyperbole will be paramount. This will present new challenges for asset managers since there is still a grey area when it comes how ESG investments are classified. For example, the Sustainable Finance Disclosure Regulation (SFDR) provides a framework for investors to articulate the degree of sustainability risk for funds that are marketed in Europe. However, there is still room for interpretation within each degree of the framework. It may surprise some investors to see fossil fuel companies in impact funds. These managers may argue that there is a case for investing in fossil fuel companies that are “transitioning” or moving away from carbon-intensive activities or are participating in net-zero initiatives to offset their emissions.
The takeaway: According to Woolf, transparency is critical. Don’t overstate your efforts or link your investment objectives to ESG unless you can back up those claims. It pays to be really clear about what you do and what you don’t do up front. Marketers are well served to work with their legal counsel, compliance departments and investment managers to develop clear, holistic guidelines for promoting and communicating ESG funds to investors as marketing initiatives come under more intense scrutiny. On the client side, there is also a significant opportunity for investor education and literacy to reduce the risk of misunderstanding, especially for retail investors. For example, delineating the difference between ESG as a due diligence or risk factor versus focusing the conversation on whether a fund is impact- or sustainability-focused.
3. Expect to field more sophisticated ESG demands
As ESG discourse becomes more sophisticated, the bar will be raised for investment managers and marketers. Woolf says that over the last two or three years she’s increasingly seen established hedge funds and private equity firms that don’t have ESG products fielding specific ESG-related questions. Those questions can range from the type of climate-related or scenario analysis they’re performing to questions about stewardship and how they monitor and measure ESG in their portfolios. As standards are getting raised, it’s also a source of opportunity: Woolf has witnessed examples of hedge funds attracting significant inflows in direct response to implementing an ESG policy that they wouldn’t have landed otherwise.
The takeaway: Asset allocators are asking sharper questions and are better able to identify good versus poor ESG processes – even for non-ESG labelled products. Expect to see minimum standards for eligibility where asset managers can stand to lose out on capital if their ESG game is not up to par. In this environment, marketers should make sure client-facing teams are armed to articulate their ESG proposition and manage more sophisticated ESG conversations.
4. More ways to tell the ESG story
Historically ESG reporting has been very “ad hoc” and “on request.” We are starting to see managers looking into more structured and consistent reporting, says Woolf. Increasingly she’s seeing robust sustainability reports with differentiated content, including case studies and concrete KPIs. In addition, many asset managers are amalgamating and reporting ESG data in the form of consolidated risk reports.
The takeaway: Strong ESG reporting can confer an important competitive advantage in addition to being a powerful tool to mitigate reputational risk.
Marketers and communicators can expect to engage in sustainability reporting using an integrated approach, including web, prospectuses, newsletters, databases, and investment communications. While marketers will have more opportunities to tell their ESG story, any marketing and communication efforts need to be done holistically as they will also have regulatory and compliance implications. Woolf advises firms to be mindful about the data they’re collecting and what their end game is, by not looking at data in silos and being thoughtful when collecting data to think ahead to its future utility.
5. A richer, more diversified ESG dialogue ahead
Today, much of the ESG discourse is on climate change, and rightly so, but marketers need to think beyond the “E” in ESG. In the future, Woolf expects the conversation to diversify, including deepening the environmental conversation beyond climate change to issues such as biodiversity. Diversity, equity and inclusion (DEI) issues are also coming to the fore. Recent geopolitical events have highlighted defence questions, which has seen asset owners and managers revisiting their stance on certain exclusions and closely monitoring their portfolios’ potential impact on reputational risk. Overall, due to the higher profile, ESG issues are receiving in the media, there is greater potential for bigger headlines and there is more reputational risk at stake for any issue.
The takeaway: In a fast-evolving ESG field, we must constantly learn and be open to change. Those who are best positioned to educate clients and communicate with stakeholders will not only win additional clients, but effectively manage risk.
Is your ESG messaging and strategy future-proof? Ext. and our network of partners have the expertise you need to optimize your ESG story and help you mitigate risk. Contact us today at 1.844.243.1830 or firstname.lastname@example.org.