Perhaps the assumption that markets are still anchored by predictable economic policies needs to be challenged. For the first time since the fall of the Berlin Wall, political volatility – once background noise – is potentially reshaping investment risk at a structural level.
Despite authorities taking their foot off the environmental, social and governance pedal and recent volatility in equities and bonds, the benefits of Artificial Intelligence and improved investor transparency are just beginning.
State Street sees big future in ESG solutions
In a new report on the phenomenon, State Street Global Advisors says the ESG “solutions space” is likely to expand rapidly in five key areas as investment managers, data firms, rating houses and index providers, regulation and compliance specialists, and consultants rush in to fill the vacuum.
The expected “significant growth” across the five business components will come after a bumper 2021 that saw, for example, ESG fund launches at more than twice the rate of new traditional investment products in the US.
Last year the number of businesses devoted to ESG ratings hit 100, the State Street report says, or double the 2020 figure. Over 2022 spending on ESG data, analytics and research is on track to grow 20 per cent or more year-on-year while compliance-related services revenue is also set to soar.
“Worldwide ESG risk and reporting software revenues are expected to double between 2020 and 2025 to [US]$720 million,” the paper says.
And in a tell-tale sign of ESG market heat, specialist consultants in the sector joined forces in a consolidation boil-over last year: during 2021 there were 13 “sustainability consultancy acquisitions” compared to four the previous year, according to figures cited by State Street.
“As financial market participants increasingly recognize that ESG is a necessary response to market demand, we expect solutions to proliferate and improve,” the report says.
However, State Street warns the ESG industry has to move on from the current hodge-podge of causes, interpretations and product-labeling to a create a more meaningful approach based around common, accountable, standards.
“Perhaps the most fundamental [question] is the definition of ESG itself,” the paper says. “… We still lack a coherent, complete and widely accepted definition that clarifies ESG’s scope. That makes it challenging for investment professionals, as well as everyday investors, to indentify whether ESG initiatives are being carried out effectively.”
Rick Lacaille, State Street global head of ESG, says in the report that investors increasingly realise ‘cash flows’ – the now dominant measure financial metric – don’t “explain everything” about business valuations.
“We see ESG as another link in the growing chain of valuation metrics, bringing previously unaccounted value into the familiar world of financial valuation,” he said.
Lacaille was a lead author of ‘The future of ESG: supplying the demand’ report alongside other State Street specialists, Anna Bernasek, Karen Wong and Phil Kim. Previously State Street Global Advisors chief investment officer, Lacaille moved into the newly created ESG role in 2020.
