HOW TO MANAGE ESG AND ALTERNATIVE INVESTMENTS

Integration of ESG and alternative investments in the asset management industry

Are you prepared to manage ESG and alternative investments? 

Otherwise, it is time to catch up. The management and communication of ESG and alternative investments will become increasingly important for any financial institution that wants to ensure its future competitiveness – both through attractive returns from investing in more stable asset classes as well as by creating positive and measurable effects.  

A trend that has already been widely adopted by European investors.

31% of European investors state that ESG is central to their investment approach compared to only 18% of investors in North America. And the investors put their money where their mouth is. Europe accounts for 83% of ESG fund assets at the end of 2022 with a positive inflow of $40 billion – despite the highly volatile financial market.

However, the growing demands from investors as well as regulatory requirements for higher transparency create a new and more complex landscape – putting immense pressure on investment managers to keep an overall view over a larger amount of data.

ESG and alternative investments offer exciting new investment opportunities

The current stock market is characterised by elevated volatility, rising inflation, and responding interest rates. 

As alternative investments refer to assets outside of bonds, stocks, or cash, they have the potential to be a strategic instrument to balance a portfolio – pushing alternative investments to become a more important factor in investment portfolios.

The same diversification trend is seen within ESG investments. 

In the future, ESG will not be relegated to a minor corner of the international investment scene: According to Bloomberg Intelligence Global, ESG assets are on track to reach $53 trillion by 2025.

Considering this, it is no wonder that ESG and alternative investments are growing megatrends in financial markets.

Four important aspects of ESG within asset management

Diversity increases the complexity of the investment strategy

ESG and alternative investments are becoming a requirement from clients – it is an expectation. However, this poses a challenge for asset managers, as alternative investments can be difficult to value since they are not traded on the traditional stock market – yet the correlation to the stock market is there in various degrees. 

Therefore, to keep track of your overall portfolio value and commitments, you most often need to be able to price and benchmark your alternatives to keep track of the market value. In addition, you normally enter alternative investments early, and as such, the investment risks are uncertain. Making the risk involved relatively high for these investments and heightening the complexity of the portfolio.

Another significant difference between alternative investments and stocks is how you need to manage them. 

In an alternative investment, you typically promise to invest a specific sum, but you do not invest the entirety upfront. However, the rest of the funds still need to be available in case of a capital call.

Why consider ESG and alternative investments?

  • 1. Balance the portfolio with alternative assets

    Alternative investments and ESG are most often more stable assets since they potentially have a lower correlation with traditional asset classes. As such, with alternative investments, you can protect investors against capital loss and instead generate more stable and reliable returns.

  • 2. Combat a volatile stock market by diversifying assets

    To withstand a volatile stock market, it is necessary to diversify the investment portfolio. Alternative investments are assets outside of the traditional stock market. As such, they are not traded on a public market which to some extent can protect the investment from market fluctuations. It is important to note that this also makes the assets less liquid. For this reason, they typically have longer investment timelines suitable for the part of the portfolio dedicated to the preservation of capital.

  • 3. Generate a positive impact in addition to financial returns

    The rising trend of ESG and alternative investing can generate more than profit. It is an opportunity to invest in projects or ideas with the intention of generating a significant and measurable positive impact. Impact investments offer a unique opportunity to showcase one’s values, especially regarding climate, environment and human rights. Not only does this open the opportunity to do good in addition to turning a profit, but it is also a valuable tool for branding and enhancing public perception.

Access to timely, accurate and complete data

With PORTMAN, you get an investment management solution that will help you boost productivity and reduce operational risks and investment complexity. Learn more by going through our product brochure.

 

Get the brochure

Regulatory demands increase complexity for asset managers

It is not only the European investors who are concerned with ESG and alternative investments. The European Union has adopted a sustainable finance agenda with the purpose of mobilising capital towards sustainable investments. 

However, the pursuit of a more sustainable financial sector also comes with significant regulatory demands. The Sustainable Finance Disclosure Regulation (SFDR) tasks financial institutions with creating periodic reports to improve transparency and combat greenwashing. 

In addition, The Markets in Financial Instruments Directive II (MiFID II) now requires financial institutions to consider the clients’ preferences when providing investment advice or portfolio management. Furthermore, MiFID II imposes financial institutions to disclose costs and impacts associated with any ESG or alternative investment.

This is some of the regulations in place to protect investors and promote transparency. But they also further complicate an already highly complex data landscape for asset managers.

Get a consolidated data overview and a solid foundation for easy management of complex investment portfolios with PORTMAN

Increased investment complexity is a result of implementing ESG and alternative investments. As are issues concerning governance and reporting.

With the integration of ESG and alternative investments, it is no longer enough to showcase exposure and returns. The environmental or social impact of the investment must be presented as well – making data control increasingly important in asset management.

Making access to accurate and complete data more important than ever as it makes it possible to easily calculate the value and exposure of active asset classes as well as potential investment scenarios. 

The investment management solution allows you to streamline your workflows and data, and as PORTMAN consists of separate modules you can customise your setup to meet all future requirements and complexities.

Shall we talk about the possibilities?

Are you curious how an investment management solution like PORTMAN can help you easily integrate ESG and alternative investments?

Alternative investments – how to ensure an attractive and stable return

Watch our webinar on-demand on how to handle and manage alternative investments.

35 years of experience developing effective investment management solutions

We develop our solution in collaboration with our clients. Among others integrating key ESG processes into PORTMAN.

Let’s enhance your company’s competitiveness

We use our more than 35 years of industry knowledge to provide you with an effective investment management solution meeting your needs today and in the future.