Research Reports 10 November 2020
Skills & Expertise for a Career in ESG Investing
The People Model for Sustainable Investing
In this excerpt from the Future of Sustainability in Investment Management report, learn how organizations use a variety of staffing models and attract-and-retain methods to ensure ESG expertise and growth in investment management career paths.
Organizations use a variety of staffing models and attract-and-retain methods to ensure ESG expertise and growth in investment management career paths toward an ESG specialty.
Organizational Commitments to ESG Research
Investment firms recognize the opportunity of sustainable investing as well as the regulatory forces and increased client expectations. Accordingly, we have seen a significant increase in expectations for ESG research going forward. Exhibit 29 shows that 90% of investment professionals expect their firm’s commitment to ESG research to increase, up from 72% just two years ago. Notably, 88% of the senior executives in our sample agree, and they will be the ones to make the needed resource allocations. Even at the largest investment firms, the number of ESG specialists is small on an AUM-weighted basis.
Incorporating ESG factors works only with senior leader support, because whatever the official organizational structure is, success will depend on collaboration. There should be incentives to reduce silos and develop education on ESG across a wider base of professionals. It is one thing when the CEO says that sustainability is important; it is another thing if that commitment is supported by a budget.
Changing the culture is not easy, and there are some parallels to be drawn and lessons learned from how risk management departments were set up in the past as separate from portfolio management. ESG factors should be integrated into the process, and it is a recipe for failure to simply have someone conduct an ESG review after the rest of the analysis has been done. All investment professionals need to understand risk, and it is the same with sustainability.
Today, there is no shortage of ESG information, and the critical need is to curate that information across investment teams and help change culture. These skills need to be spread out across the firm.
Current Structure and Roles
Among the investment professionals surveyed, the structure of teams in their ESG responsibilities varied. About one-third have dedicated ESG specialists, as shown in Exhibit 30, and in the sustainability industry roundtable discussions, we discussed this structure further. For those with ESG specialists, about half are in a separate function and half are embedded in the investment teams. One-third consider ESG expertise something that portfolio managers must know about and incorporate themselves. Many investment organizations do not have specialists because they are too small to justify the cost of an employee, their strategies do not require it, or they outsource much of this work. Although there is not a one-size-fits-all approach, most roundtable participants agreed that it is ideal for the portfolio managers to learn more about this subject and to have some specialized resource available to teams for the technical aspects of ESG analysis.
Structure Follows Strategy
An investment organization’s sustainability approach may determine how it structures its teams and ESG capabilities.
- Exclusionary screening can be done by ESG specialists who are not part of the team since they are simply asked to give a yes or no opinion because of screens.
- If the focus is on impact, a centralized ESG team with a consistent approach is needed or it will be hard to measure and report on impact, which could become challenging with clients.
- Multi-asset groups need a centralized ESG team to support the integrated view of ESG across the portfolio.
- With an emphasis on ESG integration, everyone can carry out some sustainability analysis and fund managers can have different views. Each investment team should ideally have an ESG champion.
The following are some examples in practice taken from the roundtables:
- Most big mutual funds in China have separate or specific ESG research analysts/teams. Their approach to ESG research is mostly qualitative rather than quantitative.
- One firm’s approach is to have equity analysts, fixed-income analysts, and dedicated ESG analysts; all three meet with the investee company, develop a view, and triage opinions on the company. This collective view is then passed to the portfolio manager.
- In the past, some firms had separate, specialized ESG teams reporting to the CEO that carried out special projects, but now these efforts are more mainstream.
- Because traditional analysts know more than ESG analysts about any company they cover, it is difficult for ESG researchers to gain credibility. Their expertise must be complementary. One firm has specialists covering themes (e.g., water, oil), not individual stocks, and this setup allows more global support. For example, a mining company may be thought of only narrowly in terms of ESG issues, but a water specialist could help the analyst recognize that its ports will be underwater based on current projections.1
Role of Specialists
There is some debate about whether the role of an ESG specialist is primarily to train colleagues so that ESG considerations become fully mainstream (essentially working oneself out of the job) or to be a permanent addition to a team. Integration may be possible as more professionals with sustainability-related qualifications from universities join the workforce. However, most agree that the change in approach will be a long-term process, so specialists will continue to have a prominent role for some time
The main argument for the long-term need for specialists is that the data are getting more complex and the generalist approach of the past won’t work any longer. It is not possible for someone with another “day job” to stay on top of the developments; not keeping up is a risk. Another challenge is the multi-disciplinary nature of sustainability, requiring knowledge and expertise that straddle disparate subject matter areas.
Collaboration between specialists and portfolio managers is essential, yet in active management it is important to avoid groupthink. As sustainability becomes more integrated into investment processes, portfolio managers will need to become more engaged in the conversation. The specialist team can help others frame the questions and understand the issues, but the analysts still must do the work to incorporate these issues into their analyses. Analysts are taught to be skeptical — even cynical — so they need education in this area and need to be able to own these decisions. When engaging with a company, it can help if a senior portfolio manager asks the ESG questions because doing so adds weight to the discussion.
The deeper and more specialized the ESG expertise needed, the more it will command a premium salary, and participants in our sustainability roundtables noted a relative scarcity of specialist talent. Not all firms can afford ESG specialists, however, and smaller firms may choose to outsource sustainability capabilities while slowly building up internal expertise. We suggest, however, that all firms should at a minimum have an ESG champion who is a strong leader. One drawback noted in regard to an integrated team is that all analysts and portfolio managers then require access to data providers, which could add to costs.
A Signal of Commitment
Some roundtable participants noted that they want a fully integrated team, but consultants and clients want a named specialist as a signal of their commitment to the area. Similarly, ESG standalone products provide an indication to the marketplace of a firm’s expertise and intent (“It is easier to sell an ESG fund to showcase the area”), even though the skills needed for implementation may not be as extensive as those needed for an integration strategy. Meanwhile, some organizations are wary of saying they have ESG specialists, since that will imply they have not fully integrated ESG factors.
Demand for ESG Expertise
A review of 10,000+ investment professional job posts in the month of August on LinkedIn found that approximately 6% mentioned sustainability-related skills, as shown in Exhibit 31.2
Currently, this talent is in high demand from a hiring standpoint, and this demand is rated by LinkedIn as “very high.”3 Across all investment professional roles with sustainability-related expertise, these professionals received on average more LinkedIn Recruiter InMails over the past 12 months compared with all other investment professional talent pools on LinkedIn.
Supply of ESG Expertise
It has become increasingly possible over time to hire people who are trained in sustainability, either academically or through previous work experience. There is an established job market now, but there is still a lack of talent/specialized skills in this space relative to the high demand for that talent.
An analysis of approximately 1 million investment professionals on LinkedIn found that less than 1% had disclosed sustainability-related skills in their profile, as shown in Exhibit 32.4
Previous research by CFA Institute has indicated that most investment professionals have LinkedIn profiles and the total universe approximates earlier estimates,5 although industry ESG expertise may be understated because not all individuals list relevant skills on their LinkedIn profile. Because this skillset is in demand, however, the likelihood that profiles have been kept relatively current in this regard is increased.
There has been 26% growth in sustainability expertise among this group in the last year, and details by job title are provided in Exhibit 32.
The top three locations for investment professionals with sustainability-related expertise are London, New York City, and San Francisco. These professionals are employed by nearly 500 firms, and most have a very small number of employees with sustainability expertise: The majority of firms (62%) have only one employee with sustainability-related expertise on staff. The distribution of sustainability professionals across firms is shown in Exhibit 33.
In this dataset, the gender split for all investment professionals is 74% men/26% women, but the gender gap is much smaller among sustainability professionals: Among ESG analysts, the split is 58% men/42% women, and among ESG portfolio managers, it is 65% men/35% women. A 2016 Morningstar study found that sustainability roles were more often held by women than men, although this gap had narrowed over time. During the study period (2008–2015), 1,042 new funds identified as socially conscious entered the market, which created more than 2,090 new portfolio manager positions. The authors concluded, “The rate of fund launches was so swift that there aren't enough qualified women to maintain the same percentage of fund-management roles that they previously held.”6
When trying to attract and retain talent, a clear commitment to sustainability and demonstrated adherence to those commitments can help. Many employees want to work at an organization that makes a difference and one that has values they agree with. Job applicants are increasingly asking employers about their sustainability policies and views during interviews. Sustainability objectives can be a motivational factor and spark creativity, adding an additional sense of purpose. Given the demand for ESG talent, it can be difficult to retain these employees. Because they tend to be people who want to make a difference, it is not just about compensation; if a firm won’t move fast enough, they move on.
Training in ESG issues has increased in the last three years, but still fewer than half of respondents say their firm provides ESG training. Those in Europe, the Middle East, and Africa are most likely to have had training, and training has increased the most in the Americas, as shown in Exhibit 34.
As shown in Exhibit 35, just 11% of respondents consider themselves proficient in the area, but an equal number are currently being trained and more than 70% have interest in training — half of these within the next year. This training will be accomplished through a mix of formal courses, learning on the job from others, and learning by doing.
Training is challenging, since it should not just turn into a compliance exercise. At a minimum, portfolio managers should better understand how to manage tail risk and risk-adjusted returns via understanding of material ESG risks. When an ESG problem arises, it can be catastrophic and unprecedented, so there is a relative lack of history and knowledge.
Furthermore, very senior portfolio managers who have been successful for years may not see much incentive to change their approach, and building up another set of investment beliefs is hard. Exceptions come when people experience success and the added value of ESG investing and become self-motivated champions; some of these champions are even better than actual sustainability experts, since they know the limitations and do not have unreasonable expectations, testing application of ESG considerations to the portfolio more and thinking more pragmatically about sustainability.
To be proficient in sustainable investing, investment teams need to fully understand all parts of the subject and the data in terms of what sustainability means for the investment proposition. ESG specialists will be needed to help traditional analysts get a sufficient level of ESG expertise, and as that is completed, many specialists will be able to focus on the more detailed and technical aspects of sustainability. One global firm in a roundtable had sent experts from Europe to other regions to train them and start up local sustainability committees.
Interest in up-skilling in this area has also prompted the creation of several ESG certificates and designations. Although the first for investment professionals was introduced in 2014 and others have been created for different audiences, interest levels have increased significantly, including new climate-related certificates.7 In 2019, CFA Society United Kingdom, with the support of the PRI, launched the Certificate in ESG Investing. It had more than 2,000 registrants in the first year alone and is expanding rapidly around the world. It was designed for practitioners working in investment roles who want to learn how to analyze and integrate material ESG factors into their day-to-day roles, but it has also been of interest to those in sales and distribution, wealth management, product development, financial advice, consulting, and risk management.
As further evidence of industry interest in the subject, the institutional investor research network Savvy Investor had more than 600 ESG papers published on its website in 2019, which represents a 31% increase from the prior year. Since 2016, ESG papers have grown from 4% to more than 8% of all the papers on the site. In the year ended 30 June 2020, ESG and ethical investing was the fourth most popular topic on the site, following the much broader topics of global economic outlooks, global strategic outlooks, and debt and credit outlooks. ESG papers have also been in the top five most viewed articles each of the last two years.
Meanwhile, the Financial Times began its Moral Money newsletter in 2018, and it now has 19,000 subscribers and is the most successful FT newsletter in terms of readership.
Types of Skills Needed among ESG Professionals
Sustainability experts may be called on to do many different tasks, and a combination of technical skills, soft skills, and T-shaped skills8 will distinguish the most successful ones. A greater focus on reporting will require technical expertise, and the increased client interest will mean that ESG professionals may need to spend more time interacting with clients.
Some roundtable participants noted that the ability to negotiate is important to convince other team members of the importance of ESG issues, and it is important to have the confidence to ask tough questions of the issuers in order to get decision-useful information. Meanwhile, the amount of ESG data is increasing, and distinguishing the right types of metrics to use may become more difficult. Increasingly, quant models are incorporating ESG data, and having an expert to validate the inputs and outputs will be essential.
One roundtable participant noted that it is important to look for competence rather than passion. An ESG expert must understand materiality and how sustainability affects asset prices. Subject matter expertise in asset management is helpful. Those with technical expertise can also build better models, and increasingly, ESG experts must conduct data analysis, including looking at alternative data from news sources, government websites, and satellite data, among others. Natural language processing and related programs are used to process such data in some firms, but it will take time for data to become more structured and ESG analysts will need to be able to explain the significance of the output, combining human and artificial intelligence.
Legal and regulatory knowledge is also playing a bigger part, and demand will only grow because of regulations. Firms need professionals who can create practical solutions to comply with regulations.
Good ESG professionals must not be afraid to sit down with company management or stand up at an annual general meeting and ask tough questions. They must have an ability to ask the difficult questions and know when to ask them. They must be able to listen well and build trust so companies know that investors are interested in their stories. They need to collect information from disparate sources and align it into a mosaic; it is about more than just metrics. One roundtable participant’s firm looks for people who are able to analyze the softer issues, such as culture, integrity, and attitude toward risk.
The role of an ESG specialist involves talking to many internal stakeholders to explain the issues and relevance and engaging with companies and clients externally. Good communication skills are needed for both types of relationships. One firm hired an ESG specialist charged with being a “diplomat” and “educator” across functions to persuade colleagues to consider nontraditional risks.
Another characteristic of a good ESG expert is having a long-horizon perspective — a desire and willingness to partner with management over extended cycles given the long-tailed nature of these issues. People who have been inside companies at an operational level can be very effective because they know what it means to work at a firm and they understand the politics and the constraints.
Sustainable investing is an area where T-shaped skills are needed — that is, the ability to combine deep-level knowledge with wider connections, understanding, and perspectives across the whole organization with the application of multiple relevant disciplines.
A multidisciplinary view, including the understanding of systems, is helpful for ESG specialists. They may come from many different backgrounds — for example, agriculture or biology — but they need to understand finance, too. There is a need for education and collaboration across disciplines with different viewpoints surfacing and an understanding of how data and human judgment work together.
In summary, finding just one person to cover all of this is difficult, and well-rounded teams might be more successful. For example, it may be beneficial to have a trust builder and relationship builder who has the requisite soft skills and negotiation skills to be firm and ensure that the conversations continue and develop, a data person who can work with new and alternative data and incorporate them into the investment process, and a person to translate the mission and vision of responsible investing into a coherent and realistic framework.
Can you imagine a world in which
- the investment industry primarily attracts those wanting a career where they can change the world and hiring interviews are dominated by discussions of the organization’s values and beliefs?
- investor meetings about ESG don’t require a specialist to join the meeting because all portfolio managers and analysts can describe and defend the portfolio positions and materiality of ESG factors?
- investment professionals are compensated by reference to the accomplishment of long-term risk, return, and impact objectives?
- diversity is something that your organization no longer worried about because it is both measured and managed?
- your organization’s annual report starts with soft data on the impacts of intellectual capital, human capital, and social capital on earnings?
Nelson and Schuchard (2011).
As of August 2020.
On a four-level scale used by LinkedIn to gauge hiring demand that ranges from low to moderate, high, or very high.
See the full methodology in the Future of Sustainability in Investment Management report appendix for details on the LinkedIn search parameters. Variations of these titles were also included, and results were limited to those in financial services and specific investment segments.
Research conducted by Mercer indicated 1.05 million core investment professionals globally, as published in “Investment Professional of the Future” (CFA Institute 2019a).
Sargis and Lutton (2016).
See more detail in the full report.
As described in Investment Professional of the Future, T-shaped skills are a combination of deep knowledge in a single field or part of the ecosystem and wider knowledge in the other fields or other parts of the ecosystem and the competencies to connect them.
About the Author(s)
Rebecca Fender, CFA, leads the Future of Finance initiative, which is the thought leadership platform for CFA Institute. Her group publishes studies to help investment professionals build their careers and serve their clients more effectively. Ms. Fender has testified before the U.S. House Financial Services Committee AI Task Force on the impact of artificial intelligence on investment roles. She speaks regularly at industry events and has been quoted in the Financial Times, Bloomberg, and the New York Times, among others. Prior to joining CFA Institute, Ms. Fender was a vice president at BlackRock working with pension funds and endowments, and she also worked at Cambridge Associates, where she published research about manager selection. She earned her undergraduate degree in economics from Princeton University and holds an MBA from the Darden School at the University of Virginia.
Robert Stammers, CFA, is director of Investor Engagement on the Future of Finance team for CFA Institute. Prior to joining CFA Institute, Mr. Stammers was the principal for his founded company, where he consulted to aide real estate owners, lenders, and syndicators, develop and analyze structured real estate investments.
As a senior executive for several institutional fund managers, Mr. Stammers was the portfolio manager for a $1 billion enhanced real estate fund, a $1.2 billion private timber fund, and several pension fund separate accounts.
Mr. Stammers has his bachelor of arts in economics from Connecticut College, his masters in business administration from Emory University, and was awarded the CFA designation in 1997.
Roger Urwin is global head of investment content and advisory director at Towers Watson. Previously, he was global head of its investment practice and worked at William Mercer and Gartmore Investment Management. Mr. Urwin is the author of a number of papers on asset allocation policy and manager selection and serves on the board of the Institute for Quantitative Investment Research and as advisory director to MSCI. He holds a master's degree in applied statistics from Oxford University and has qualified as a fellow of the Institute of Actuaries.
Rhodri Preece is Head of Industry Research for CFA Institute. He is responsible for building and maintaining the global thought leadership function at CFA Institute, including leading the planning, coordination and creation of research content across CFA Institute research platforms including the Financial Analysts Journal, the Research Foundation, and the Future of Finance initiative.
Rhodri formerly served as head of capital markets policy EMEA at CFA Institute, where he was responsible for leading capital markets policy activities in the Europe, Middle East and Africa region, including content development and policy engagement.
Prior to joining CFA Institute, Mr. Preece was a manager at PricewaterhouseCoopers LLP where he specialized in investment funds.