When creating a roadmap for ESG integration, senior management need to acknowledge that fully integrating ESG factors into an existing investment process will take time and require significant resources. The main reason approaches differ between organisations is the level of commitment from senior management and their acceptance of the premise that ESG factors can have an impact on investment returns. The degree of senior management support will determine whether sufficient budget for resources and personnel will be allocated to the entire integration process and will therefore chart the course for activities and techniques implemented, contracted vendors, and the selected organisational structure.

Two common options for incorporating ESG into the organisational structure  

1. Investment team driven: Portfolio managers and investment analysts conduct the ESG analysis and integrate it into overall investment analysis and decisions.
2. Dedicated ESG team: An ESG team conducts the ESG analysis, which is passed on to the investment teams and integrated into overall investment analysis and decisions.

According to The United Nations Principles for Responsible Investment (UN PRI), each organisational structure has its own advantages and disadvantages. The following table summarizes the more commonly accepted pros and cons of each approach.

Investment team driven options are usually selected by small to mid size asset managers, that are more cost-conscious and likely  experience less pressures from regulators or institutional investors to integrate ESG. However, other indirect costs arise from portfolio managers having to allocate sufficient time to researching ESG issues and deepen their understanding of the latest ESG themes and international standards.

On the other hand, a dedicated ESG team is the preferred option for asset owners and larger asset managers. Despite the higher operating cost, this option allows firms to more holistically integrate ESG. Integration throughout investment and non-investment related areas (e.g., governance, compliance, internal audit, data management, back-office) prepares organisations to be better positioned to meet current and future regulatory and clients demands.

A third structure is emerging

At Invartis we have developed a model that maximizes the advantages of both structures while mitigating their disadvantages. In our model an expert team of ESG SMEs conduct detailed ESG analysis at a portfolio and security level while a team of Integration Specialists sit with investment teams to fully integrate ESG into the overall investment analysis and decision-making processes.

If you believe your firm and team would benefit from exploring different ESG integration approaches, do contact us for more information and a discussion on how Invartis can help you put in place robust ESG policies and processes.

For Singapore-based investment managers that are looking to comply with MAS guidelines on Environmental risk, we provide a cost-effective, end-to-end ESG solution that combines integration consulting and an outsourced managed service. Our structured service helps investment managers holistically integrate ESG best practice, comply with new MAS guidelines, and strengthen the resilience of client assets against environmental risk. Find out more here.