5 ESG Trends that Asset Managers Should Follow Closely in 2023
Prosek Partners has a strategic investment in Blue Dot Capital (see below for more on Blue Dot). The two firms have been working together for several years to offer our clients integrated strategic ESG consulting and ESG communications services.
2023 is poised to be another eventful year for ESG. As such, the Blue Dot team has compiled a list of the 5 trending ESG asset management topics we’re keeping an eye on:
#1: The Inflation Reduction Act (IRA)
Historic U.S. climate legislation has already led to new manufacturing plans being announced across states, including manufacturing of components that have thus far not been produced in the U.S. Several of our clients are actively investing or raising capital to invest in the end-to-end value chains and ancillaries of the domestic energy transition. We will continue to work with our clients to monitor how the IRA impacts and transforms the U.S. decarbonization economy.
#2: ESG polarization in the U.S.
While some U.S. asset owners have characterized ESG integration as “woke" capitalism and accused asset managers of boycotting fossil fuels (despite managers' assurances to the contrary), others such as the New York City Comptroller and Chicago Public School Teachers' Pension & Retirement Fund have stepped up their climate commitments. And while antitrust risks have been cited by ESG critics, lawyers are advising financial institutions on the potentially bigger risk of being unable to appropriately consider climate considerations and failing to fulfill fiduciary obligations.
With control of the House of Representatives changing hands, we anticipate more Congressional scrutiny of ESG.
In the short term, the political divisiveness will have messaging implications for asset managers’ strategies. It will be essential for asset management leadership teams to be able to defend their ESG commitments citing materiality and fiduciary duty considerations, and to be able to reconcile near-term resilience with Net Zero pledges.
However, economy-wide decarbonization and socioeconomic behavioral shifts are secular tailwinds, and businesses will continue to deploy resources towards strategic, competitive, ROI-driven ESG initiatives.
#3: The evolution of industry alliances
In recent months, valid reservations have been raised about the efficacy of big tent coalitions such as the Glasgow Financial Alliance for Net Zero (GFANZ), Net Zero Banking Alliance (NZBA), etc. Even Principles for Responsible Investment (PRI), for long a bastion of the collective ESG interests of investors, has faced questions about its continued relevance and ability to effectively deliver against the aspirations of a diverse signatory base.
We hope these key organizations continue to evolve and strengthen their purpose and positioning, as they play a critical role in creating a shared understanding, building institutional knowledge, and spurring wider adoption of ESG principles and frameworks. In the interim, we anticipate allocators to have a more reasonable, clear-eyed assessment of asset managers' ESG industry affiliations.
If asset managers are considering supplemental ESG/climate commitments in 2023, we would recommend thorough readiness assessments with legal counsel closely looped in.
#4: Regulatory clarity on ESG
Despite domestic polarization, regulatory momentum on ESG remains strong. In the EU, the Corporate Sustainability Reporting Directive (CSRD) is set to materially expand disclosure requirements as well as the number of companies required to report from 11,000 to upwards of 50,000 including multinational companies doing business in the EU. In the U.S., clarity is expected on the status of the SEC's climate-related proposals. Although there has been widespread resistance to mandatory Scope 3 disclosure, we expect the final rules to take a materiality-driven approach to Scope 3 disclosure, which will have significant emissions disclosure and management implications for listed companies and businesses (public and private) within their value chains.
Across jurisdictions, financial regulators are closely scrutinizing and/or codifying rules on the ESG credentials and procedures of funds and products, including private markets offerings.
In this environment, it is imperative for asset managers to have an ESG program underpinned by a focus on materiality, fit-for-purpose integration framework(s), audit-ready reporting infrastructure, and performance record(s) (wherever applicable). We would also emphasize the merits of ensuring that all relevant functions and personnel are equipped with necessary information, context and resources on the firm's ESG program and the broader landscape.
5. ESG thought leadership and communications
Writing this on Prosek’s platform, we would be remiss if we did not share our perspectives on ESG thought leadership and communications opportunities.
Against the backdrop of a crowded ESG market and a difficult macro environment where asset management operating expenses will be under scrutiny, we are advising clients to reevaluate ESG communications tactics beyond ESG events.
In 2023, asset management firms can explore developing short, decision-useful research on the ESG opportunities, challenges, and innovations of industries and markets they specialize in. In our opinion, such research serves 2 important purposes: i) it is an effective way to communicate the firm’s ESG thinking and position to allocators and clients and ii) it demonstrates, to the wider stakeholder groups, the firm’s commitment to thoughtfully and critically examining pertinent ESG issues. 
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About Blue Dot Capital:
Blue Dot Capital is a sustainable finance consultancy. Blue Dot partners with financial services firms to support the end-to-end development and execution of ESG and impact investing programs, capabilities, and products.
Blue Dot’s clients and partners include traditional and alternative investment managers, family offices, and data providers.
If we can support to institutionalize and deepen your ESG capabilities, please reach out at dhruti@bluedotcapital.co (Dhruti Patel, Director & Practice Lead, Real Estate) and jelmer@bluedotcapital.co (Jelmer Laks, Senior Associate).