David Reed / 05 December

The ESG Dilemma

Landscape of wind turbines

In an era of increasing Environmental, Social and Governance (ESG) product development, driven by growing client demand and regulator scrutiny, investment firms face a hiring dilemma since skills and candidates are in short supply. In response, candidates need to work hard to develop the required investment skills.

Growing demand for ESG skills

A cursory glance at the investment press over the last year or so reveals more Environmental, Social and Governance (ESG) related investment product development than ever before. Investment houses are responding to demand from both retail and institutional investors for more responsible investing options.

Many of these new, creative investment solutions move beyond the simple ‘negative screen’ to integrating responsible investing into the fundamental analysis and portfolio construction phases of the investment process. Regulation and policy is also pushing this trend, while firms themselves are concluding that their long-term success depends on being socially inclusive and environmentally sustainable.

Perhaps counterintuitively, the rise of passive investing has also boosted shareholder activism on ESG issues, with several of our clients putting large engagement teams in place to influence the companies they hold in their index portfolios to be more ESG responsive. This is becoming a key way, beyond simply price, that an index fund provider can distinguish itself from its competition.

ESG skills crunch in perspective

Product creativity has flourished, sparking an ESG staff shortage. Firms are fighting over the limited number of analysts, with some unintended consequences including salary inflation and rushed hiring decisions that don’t meet the expectations of the candidate or the hiring company.

Specifically, investment firms are facing a dilemma, which is that the skills needed for ESG analysts combines two divergent skillsets: investment expertise and ESG expertise. On occasion, new ESG analysts can face a bit of culture shock, when they may take up more of an activist role, rather than that of an analyst. In response, asset managers increasingly prefer ESG analysts to come from a fundamental research background. Failing that, they are seeking candidates can can demonstrate a knowledge of financial theory and financial modelling. Firms are also driven in part by the momentum to integrate ESG considerations deeply into investment processes.

Implications for candidates

For candidates, this means aiming to be well-rounded in order to develop their career as an ESG analyst. Prospective ESG candidates should look at developing skillsets in five key areas:

  • Screening, which involves applying various client or fund-specific screens to a pool of securities to be analysed. These can include factors such as tobacco, fossil fuels or weapons.
  • Fundamental analysis, which can include examining security-level ESG considerations from stranded assets (those that will be rendered valueless by ESG considerations, such as climate change, but are currently still on a balance sheet), or evaluating whether a security that wasn’t caught by a screen meets self-imposed ESG criteria.
  • Portfolio construction, considering inputs such as external ESG ratings or a portfolio’s carbon footprint.
  • Engagement, where ESG teams engage directly with companies on ESG issues, such as diversity, pay equity and carbon footprint.
  • Reporting, such as preparing client ESG reports where required, annual ESG firm-wide reports and reporting to signatory bodies, such as the UN Principles for Responsible Investment.

If your firm has ESG vacancies, we can help advise you on what to look for. Likewise, aspiring ESG analysts should contact us as we often have several ESG-related roles.

Contact us for more information, or to discuss potential opportunities on 02070334499 / info@masonblake.com

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