MGT707 How do Asset Managers Utilise ESG Criteria in Investing Assignment Sample

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Introduction: The Role of ESG in Asset Management Strategies

Asset managers have been integrating the environmental, social, and governance (ESG) criteria into their investment strategies to assess a company's sustainability and responsible business practices alongside traditional financial metrics. In terms of this, managers need to mitigate various risks related to environmental, social, and governance factors, which can impact a company's performance and reputation. On the other hand, asset managers have been recognising that strong ESG practices can enhance long-term financial returns, as companies with a focus on sustainability may experience cost savings, reduced risks, and improved competitiveness (Ahmad, Yaqub and Lee, 2023). They engage with portfolio companies to advocate for better ESG practices, offer ESG-focused investment options, and prioritize transparency and regulatory compliance in ESG reporting.

Objectives

• To identify the impact of ESG promotion on the financial performance in the company’s investment portfolio’s
• To examine the aspects of asset management through which approrpite integration of the decision making process can be possible
• To investigate the challenges and barriers faced by the assets manager in effective utilisation of risk management in the firms
• To explore the role of regulatory frameworks and industry standards in shaping how asset manager incorporate ESG criteria under the investment strategy

Literature review

The Evolution of ESG Integration in Asset Management

Different issues have been persisting at the global level such as climate change, social inequality and corporate misconduct and for that, companies need to focus on the perspectives related enhancement of taking adequate approaches to reduce such challenges. Investors have also been promoting investment options that has also been promoting sustainability and align with their values (Zhan and Santos-Paulino, 2021). Investors need to focus investments to make a positive impact and address these pressing issues. ESG integration have been offering asset managers to mitigate such challenges through which appropriate changing investor preferences can also promote opportunities for responsible investing.

In April 2021, the SEC's Division of Examinations have issued a Risk Alert and it has also been focusing on the ESG investing within the asset management industry (Kirkland, 2021). Their examination areas cover a wide range of aspects and it has also been including portfolio management, performance advertising, marketing, and compliance. They plan to evaluate various aspects of ESG including policies, due diligence processes, proxy voting practices and compliance with disclosure requirements. The SEC's aim is to address deficiencies such as inconsistent practices and weak guidelines (Winston, 2022). The SEC has also been recommending that there is a clear disclosure and it has a well-defined ESG policies and the integration of compliance measures into the ESG process.

Performance Implications of ESG Integration

The examination of ESG integration's impact on financial performance has yielded interesting findings. Among studies focusing on corporations, 58% have shown a positive correlation between ESG factors and financial performance, particularly when assessing operational metrics such as ROE, ROA, or stock prices. Only 8% of these studies found a negative relationship, with 13% showing a neutral impact and 21% reporting mixed results (Rockco, 2022).

For investment-related studies that typically consider risk-adjusted measures like alpha or the Sharpe ratio on a portfolio of stocks, 59% indicated that ESG integration resulted in similar or improved performance compared to conventional investment approaches. Only 14% reported negative outcomes (Rockco, 2022). In the context of climate change or low-carbon studies, 57% of corporate-focused research concluded that ESG integration had a positive impact on financial performance. Meanwhile, 29% reported a neutral effect, 9% found mixed results, and 6% indicated a negative impact. Among investor-focused studies in this area, 65% showed positive or neutral performance compared to conventional investments, with only 13% reporting negative results.

However, it is important to note that research on ESG and financial performance sometimes suffers from inconsistent terminology and definitions. Additionally, the distinction between embedded sustainability ESG integrated into business strategy and traditional Corporate Social Responsibility (CSR) have been focusing on the community relations and philanthropy. Therefore, it has also been leading to variations in research findings. Furthermore, a study has also been assessing the financial performance of companies mandated by the Indian government to allocate 2% of their profits to CSR activities predominantly. It is also related to philanthropy and community relations. Therefore potential benefits of ESG integration have also been provided through the material ESG issues that could enhance long-term financial performance.

Role of regulatory frameworks and industry standards in shaping how asset manager incorporate ESG criteria under the investment strategy

Sustainable development goals (SDG) has been investing on the perspectives of increasingly capturing the attention of socially responsible investors investment strategies with global sustainability initiatives, particularly those set by the United Nations. In this context, the OECD and MSCI have collaborated to produce a research paper titled “Institutional Investing for the SDGs” (Pucker and King, 2022). This paper is designed to foster dialogue among market participants and stakeholders regarding how institutional investors can incorporate UN Sustainable Development Goals into their investment strategies.

For investors, social impact and financial returns have also been promoting the aspects related to investment strategies. The strategies chosen by asset managers can either explicitly or implicitly influence the clarity of the impact on end-investors. This includes whether investments are promoting companies that are more transparent in risk disclosure and management.

Although regulatory frameworks in various jurisdictions are starting to include ESG factors, this is still not widespread. Consequently, it falls on institutional investors to determine how ESG integration aligns with their duties, including prudential standards, legal requirements, and obligations to beneficiaries (Pucker and King, 2022). This leaves room for diverse interpretations. Some investors might view ESG issues as non-financial and irrelevant for prudent investment, while others might see the analysis of ESG factors as crucial for understanding both company quality and macroeconomic trends.

Specific examples of regulatory changes include the UK’s Pensions Regulator's new Defined Contribution Code and trustee guides. It has also been encouraging ESG consideration in investment, aligning with the Law Commission’s findings (McCahery, Pudschedl and Steindl, 2022). In South Africa, an amendment to the Pension Funds Act in 2011 highlights the importance of considering factors, including ESG that could impact the sustainable long-term performance of a fund's assets.

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Furthermore, while regulatory frameworks provide the flexibility for ESG integration, they do not necessarily promote it. Policymakers may consider encouraging institutional investors to integrate ESG factors into their investment governance, potentially enhancing market efficiency and risk assessment. Regulators can also differentiate between ESG integration for financial reasons and ethically motivated investing and it has also been addressing any remaining regulatory barriers to ESG integration and exploring additional measures like reporting requirements to support ESG integration across various investor types (McCahery, Pudschedl and Steindl, 2022).

Theoretical perspectives

Asset managers have also been promoting the Environmental, Social, and Governance (ESG) criteria under their investment strategies. Therefore, it has also been reflected in a growing recognition of the importance of these factors in determining a company's long-term success and sustainability. From a theoretical standpoint, the concept of sustainable investing has also been that companies with strong ESG practices are mainly promoting the sustainable long run. This perspective has also been enhanced by the risk management theory and it has also been holding the ESG criteria that can reveal potential risks (Pucker and King, 2022). The stakeholder theory has also been supporting this approach and it suggests that companies need to serve the interests of all stakeholders. Therefore, it has also been including employees, communities, and the environment. ESG investing perspectives have also been aligned with the impact investing movement, which focuses on creating positive social or environmental impacts.

Methodology

Asset managers are increasingly incorporating ESG factors to enhance portfolio performance and sustainability. Understanding regulatory challenges and investment impacts is crucial for success. Get support from the Best Assignment Help Website for Instant Support and ensure well-researched, high-quality academic work tailored to your needs.

Introduction and Research Question

The methodology chapter has been demonstrated that the researcher can adequately get a clear path to promote the research. It is also identified that by focusing on the perspectives of research design, approaches and philosophy appropriate research can also be established. It is also to be stated that methodology has also been helping in the promotion of research paths through which appropriate research papers can be produced. On the other hand, it is also identified that enhancement of research quality can also be possible through this.

Research questions

• How do asset managers incorporate ESG aspects under the investment selection and portfolio construction processes?
• What are challenges do asset managers focus on in terms of integrating the appropriate investment strategy?
• How do regulatory bodies influence the adoption of ESG criteria in asset management?
• What are the financial performance implications of ESG integration for asset managers and their clients, and how do these implications vary across different asset classes and investment strategies?

Research Philosophy

The incorporation of a trusted philosophy assists the breakdown to be tailored to the context as well as makes sure of adherence to every distinct terminology in an extensive context. Positivism and Interpretivism are the two of the most renowned breakdown paradigms that have been employed by an enormous number of researchers in extensive contexts (Park, Konge and Artino, 2020). The “positivism research philosophy” determines the empirical proofs and examination as the primary foundation stone for commencing and forwarding the study and set principles (Junjie and Yingxin, 2022). It has been noted that the positivism paradigm is well-structured to the extent to which the datasets are more predictable and distributions are more objective rather than subjective in nature. In contrast, the positivism paradigm is widely criticised for its failure to take into account the key motivators and their influence behind constituting a transformation (Karadzhov, 2019). Consequently, it also finds it difficult to comprehend the human interventions or external factors for the circumstantial changes. Therefore, positivist philosophy has been found to be more suitable in quantitative research than the qualitative one and decided not to be incorporated in the breakdown.

On the other hand, the “interpretivism research philosophy” is beneficial to take into account the influence of different motivators that consist of human interactions as well as societal classification behind the distribution of circumstantial evidence and their transformations (Alharahsheh and Pius, 2020). Nevertheless, it also provides better validity behind factors that are responsible for the situational changes in the broader context which is hard to find in the positivism paradigm. The interpretivism paradigm provides a comprehensive degree of assistance towards the fabrication of the judgement by describing every aspect regarding the cultural, social, and involvement of people. Apart from that, it also allows a multifaceted method to judge the real functioning of societal characteristics and their potential implications on the situational elements (Nickerson, 2023). This distinct feature of the paradigm allows researchers to adhere to different perspectives of the external influencers as well as their potential implications (Van Der Walt, 2020). Concisely, the interpretivism paradigm has been incorporated to adhere to all of these characteristics and lead to the ultimate execution of the qualitative breakdown and analysis of the flexibility of ESG incorporation.

Research Design and Methodology

In this research paper, an inductive research design will be adopted in terms of managing the data collection process. Therefore, this design has been helping to enhance the new theoretical perspectives development through which adequate aspects related to the pre-existing theory can be used (Thorsten Schoormann, Frederik Möller and Magnus Paulsen Hansen, 2021). Effective use of the collection has been leading to the enhancement of research quality. Furthermore, the demonstration of the qualitative approaches such as the effective use of annual reports of the company, different regulatory frameworks, and overview of journals has also been helping to achieve research objectives adequately (Thorsten Schoormann, Frederik Möller and Magnus Paulsen Hansen, 2021). It is also to be stated that the qualitative data collection method has also been involving the perspectives of the non-numerical data for that statistical data will be excluded from this research perspective. In terms of the collection of data through Google Scholar, Science Direct and other authentic sites, pre-existing journals published after the 2013 will be used for this research. It will also help to collect current information and data through which appropriate findings can also be produced.

Managing the data collection has also been including the perspectives related to the exclusion of journals that are paid and not peer-reviewed. It is also to be stated that in terms of the thematic analysis Braun and Clerk thematic analysis method will be used. It will also help to collect themes and sub-themes data. It is also to be stated that in terms of the thematic analysis, the method related to abstract screening, keyword searching and the full-text screening has been followed through which appropriate themes can be identified. In terms of the inclusion of and exclusion of data, it will adequately help us to form appropriate research themes. Development of appropriate themes has also been taken into consideration in terms of managing the perspectives of the development of themes (Lochmiller, 2021). It has also been identified that through appropriate promotion of the different kinds of aspects such as enhancement of quality of the research.

Limitations, Reliability, Validity and Ethical Considerations

A comprehensive degree of adherence must be tailored towards the ethical frameworks during the examination to ensure its broader validity and authenticity. This research has taken into account an extensive degree of ethical congruence to attain a topmost level of authenticity (Ruggiano and Perry, 2019). Patent legislation has been looked for to ensure a transparent employment of datasets and avoid any violations in the larger context. It has been perceived that complying with the patent legislative framework has ensured that the research does not employ any of the datasets through exploitation or any wrong menace in the comprehensive context. Besides this, a strict monitoring has been established to ensure that copyright requisites are being obliged and have not been used with any malicious intentions.

Apart from that, a transparent reporting has been constituted that all citations of different sources are being employed and do not violate any of the originality of those papers (Weston et al., 2019). All papers have been taken from reliable sources to avoid any kind of malpractice in terms of ethical comprehension of the research. “General Data Protection Regulation” (GDPR) has been taken into account to reciprocate broader obligation to the data privacy and utilisation of datasets oriented to execute the breakdown. Overall, it can be stated that the breakdown has made serious obligations with a distinct number of ethical frameworks that ensure its authenticity and lead to ultimate execution.

In terms of measuring the reliability of the research, authentic journals and articles will be preferred (McDonald, Schoenebeck and Forte, 2019). Furthermore, the paid journals will also be excluded as they will not provide comprehensive information on the research perspectives. It is also to be stated that the development of appropriate themes can also be possible by focusing on the reliability perspective as it has been helping in the promotion of research quality.

There is a wide range of limitations that could be reciprocated during the execution of the secondary qualitative breakdown in an extensive assortment. It has been found that secondary qualitative datasets do not provide extensive attention to the objective elements for the conclusion regarding the situational characteristics (Poth, 2019). It is conceivable that optional investigators won't approach all of the foundation information that the first specialists did. The profundity of cognizance and understanding might be obliged by this shortfall of setting. It has been perceived that a piece of the first information is accessible, there can be information holes that make it hard to do an exhaustive investigation (Haynes et al., 2019). Predisposition might have been presented when the underlying information was assembled considering specific review questions. While assessing information that is beyond its underlying concentration, auxiliary investigators might have to utilize an alert.

References

• Ahmad, H., Yaqub, M. and Lee, S.H. (2023). Environmental-, social-, and governance-related factors for business investment and sustainability: a scientometric review of global trends. Environment, Development and Sustainability. [online] doi:https://doi.org/10.1007/s10668-023-02921-x.
• Kirkland (2021). Risk Alert: SEC’s Examination Division Issues ESG Risk Alert for Investment Advisers | Publications | Kirkland & Ellis LLP. [online] www.kirkland.com. Available at: https://www.kirkland.com/publications/kirkland-aim/2021/sec-examination-division-highlights-deficiencies [Accessed 20 Dec. 2023].
• Rockco (2022). ESG and Financial Performance. [online] Rockefeller Capital Management. Available at: https://www.rockco.com/strategic-insights/esg-and-financial-performance/#:~:text=We%20found%20a%20positive%20relationship [Accessed 20 Dec. 2023].
• Winston (2022). Winston & Strawn. [online] Winston & Strawn - Regulation Best Interest: SEC Highlights Deficiencies and Weak Practices Related to Compliance. Available at: https://www.winston.com/en/insights-news/regulation-best-interest-sec-highlights-deficiencies-and-weak-practices-related-to-compliance [Accessed 20 Dec. 2023].
• Zhan, J.X. and Santos-Paulino, A.U. (2021). Investing in the Sustainable Development Goals: Mobilization, channeling, and impact. Journal of International Business Policy, 4(1), pp.166–183. doi:https://doi.org/10.1057/s42214-020-00093-3.
• Pucker, K.P. and King, A. (2022). ESG Investing Isn’t Designed to Save the Planet. [online] Harvard Business Review. Available at: https://hbr.org/2022/08/esg-investing-isnt-designed-to-save-the-planet.
• Alharahsheh, H. and Pius, A. (2020). A Review of Key paradigms: Positivism VS Interpretivism. Global Academic Journal of Humanities and Social Sciences, [online] 2(3), pp.39–43. doi:https://doi.org/10.36348/gajhss.2020.v02i03.001.
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