Alternatives, ESG Continue Gaining Traction

Asset managers and consultants alike continue to position their businesses for a rise in ESG investing.

Alternative investments come under Cerulli’s scrutiny in the July 2015 issue of “The Cerulli Edge -U.S. Monthly Product Trends Edition,” which takes a look at alternative investing in the form of environmental, social, and governance (ESG) considerations.

As institutions pursue alternative strategies for both diversification as well as potential return, ESG investing continues to gain traction even while retirement plans grapple with how to incorporate ESG investing into their lineups when advisory opinions from the Department of Labor (DOL) can make it difficult to do so. 

The United Nations Principles for Responsible Investment (UNPRI) remains a catalyst for the ESG/responsible investing movement, according to Cerulli’s report. Asset managers, consultants and asset owners alike use these principles as a starting point when beginning to consider factors in an ESG/socially responsible context. As of April, signatory assets under management totaled more than $59 trillion, with more than 1,380 signatories.

Although the marketplace owes a great deal of credit to the UNPRI for setting standards, it is not without some shortcomings. In one research discussion with a consultant who specializes in ESG-oriented investing, Cerulli learned that the reporting requirements for asset managers under the UNPRI are largely process-oriented. This can potentially lead to signatories looking to only “check the boxes” and claim they are following the UN’s guidelines in order to boost their ESG credentials.

As ESG investing gains an increasing share of media attention, new firms have entered the market looking to distinguish themselves based on their ability to identify possible ESG investing opportunities and truly abide by ESG-oriented practices, according to Cerulli’s report, which cites a firm that follows a systematic, intentional approach when choosing investments. As well as its investment management capabilities, it produces thought leadership through weekly/quarterly insights. Cerulli notes the importance of managers following a transparent process that details how they are integrating ESG factors in their investment process.

Other highlights of the research are:

  • Most exchange-traded fund (ETF) sponsors (70%) believe the alternative space shows unmet demand for ETF products.
  • Sponsors are optimistic about inflows into the alternative asset class: 50% of sponsors believe alternatives will experience inflows over next 12 months in the institutional channel.
  • Mutual funds ended the first half of 2015 with assets totaling $12.5 trillion, up only 2.7% from the December 2014.
  • ETF assets declined for the first time since January, falling by 1.7% in June.
More information about the July 2015 issue of “The Cerulli Edge -U.S. Monthly Product Trends Edition,” including how to purchase, is on Cerulli’s website.