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A new report said that there is growing demand for transparency in reporting from asset managers by asset owners, according to the latest Cerulli Edge—U.S. Institutional Edition. 

Due to this increasing pressure from stakeholders – which includes regulators, clients, and the public - asset owners are now requiring asset managers to provide clear and comprehensive reports on ESG-related activities.

“This demand for transparency reflects the broader push for responsible and accountable business practices across industries,” said Gloria Pais, an Analyst at Cerulli Associates.

Reporting is a hot potato in the industry. At Fund Operator Summit | Europe 2024, Arun Kelshiker, independent ESG Advisor and former head of Asset Allocation and Portfolio Strategy at Standard Chartered Bank, said the issues of reporting and its place in the future of the industry were important due to the proliferation of reporting regimes.

ESG at the fore

According to the research in the report, 58% of institutional investors require or plan to require asset managers to provide portfolio-level exposure to financially material ESG risks, along with impact and thematic reporting.

This comes even as it was revealed in August last year that 84% of listed companies, including numerous asset managers, investment firms and other financial services companies, were “not aligning” with net zero, making it the least mature of five alignment categories established by the Net Zero Investment Framework (NZIF).

In a report by the MSCI Sustainability Institute “not aligning” was defined as that they are yet to commit to decarbonise in line with achieving net-zero, it specified.

“Institutional investors want to ensure ESG considerations are not just a passing trend,

but a fundamental part of the investment process."

In the new report, it was noted that 23% of asset owners now required their asset managers to report on ESG-related engagement activities—a similar proportion (22%) will implement this requirement within the next two years.

“Institutional investors want to ensure ESG considerations are not just a passing trend, but a fundamental part of the investment process,” said Pais. “As such, asset managers must step up their reporting efforts to meet the expectations of asset owners and remain competitive in the evolving market,” she adds.

In the report, Cerulli said that achieving this level of transparency would not be possible without challenges. “One of the biggest obstacles is the lack of standardised reporting guidelines for ESG metrics,” it said. “Many asset owners struggle to define ESG risk and impact consistently across different sectors and industries. This lack of consistency makes it difficult for asset owners to compare performance across their portfolios and make informed decisions.”

It added that the industry's efforts to standardise terminology and measurement frameworks for ESG reporting are ongoing, but significant hurdles remain.

More than one-third of asset owners – 38% – cited the difficulty of defining ESG boundaries as one of their main challenges, particularly when differentiating between ESG and impact investing. “Asset owners face the daunting task of aligning their investment decisions with the broader ESG framework without consistent reporting standards,” said the report. 

Crucially, however, while backlash to ESG has escalated in recent years, no managers surveyed in the report said they would “stop incorporating ESG considerations into investment decisions in 2024”.

“Rather, a sizeable portion of managers have decided to simply moderate their messaging on the issues,” it said.

More than one-third of asset managers (42%) say they will continue to incorporate ESG considerations but will be “cautious about messaging around responsible investing-related activities”.

"Standardised reports on ESG risks and impacts can help asset managers

attract more institutional clients."

Just 4% of managers say they will continue to incorporate ESG considerations into decision-making, but they will no longer offer ESG/ sustainable investment products.

Reporting issues

The report said that as asset owners begin to demand greater transparency and ESG accountability, those asset managers committed to helping their clients navigate responsible investing programs should invest in robust reporting systems that meet these expectations.

“Comprehensive, standardised reports on ESG risks and impacts can help asset managers demonstrate their commitment to responsible investing and attract more institutional clients,” says Pais.

This has occurred in other parts of the world already with extensive legislation in Europe. “Looking back at 2023 and at the first half of 2024, regulatory sustainable finance disclosure and reporting regimes continued to evolve across different geographies worldwide,” Cornelia Frentz, Director - Governance and Sustainable Investing, European Circular Bioeconomy Fund, told Fund Operator in 2024.

“The period saw an emphasis on stricter stances on ESG reporting and greenwashing, in particular,” she said. “The financial marketplace is transitioning from a voluntary disclosure regime towards mandatory disclosure requirements and that's important to us because we are investing in companies in the EU27 and 16 other countries with which the European Union has economic agreements.”

Pais said asset managers at the crossroads of evolving market demands should focus on integrating ESG considerations into their investment processes. “These steps will help asset managers remain competitive and align with the values of their institutional clients,” she said.

 

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