Why Investment Firms Need to Bridge the ESG Skills Gap

Soaring geopolitical tensions, a global economic slowdown, an anti-ESG backlash. You might expect these recent developments to have dented demand for sustainable finance talent. Not a bit of it.

US-based finance professionals whose job titles include ‘ESG’ or ‘sustainability’ earn on average around 20% higher base salaries than colleagues of the same seniority without those labels, a Reuters analysis found in May 2023. The premium is more like 30% in Hong Kong, according to headhunters _¹

This scramble for ESG expertise has come on the back of the rapid growth of sustainable investment. Fund managers globally are expected to increase their ESG-related assets under management to USD33.9 trillion by 2026, from USD18.4 trillion in 2021, according to PwC.

As a result, they are facing a proliferation of ESG-related regulation, investors pushing for greater transparency, and the rising need to gather and assess new types of data.

The shortage of genuine know-how is becoming more acute and harder to ignore as the ESG market expands, products become more sophisticated, and regulators and investors demand more transparency from asset managers.

In January 2022, 68% of finance professionals in a Canadian survey pointed to a lack of skills in areas of ESG specialization. The report indicated a growing gap between the availability of sustainable finance skills and what will be required to support growth in the field.

Other markets tell a similar story. Ireland is short of ESG talent, according to a study published in June 2022 by Ibec, Ireland's largest business lobby group. That’s a problem because, as Ibec says, a “mission-critical aspect of the transition to a low-carbon economy is having sufficient access to sustainable finance skills and talent”.

The most recent CFA Institute research on the topic showed that in August 2020, 18% of 1,032 job posts for portfolio managers on LinkedIn were seeking sustainability skills, but only 1.5% of some 146,000 portfolio manager profiles cited sustainability skills (see charts below). That said, the one-year growth rate of sustainability expertise among portfolio managers was promising, at 32%.

Ultimately, the shortfall in sustainable finance expertise hinders investors’ ability to integrate ESG factors into their strategies, mitigate environmental and social risks, and ensure their capital has a positive impact.

So why are ESG skills so important in the investment industry, and how are institutions looking to plug their gaps in expertise?

Tracking ESG factors

Investors are increasingly having to take ESG factors into account, whether or not they believe ESG performance is linked to returns, as research seems to suggest. A growing number of regulators and accounting bodies view climate, biodiversity and potentially even social matters, such as human rights, as posing material financial risks. And they are setting policy and standards accordingly, with markets like the EU and UK leading the way.

As corporate disclosure of ESG factors grows in volume and complexity, asset managers and owners will need more relevant expertise to track their performance in these areas. As is often said, you can’t manage what you don’t measure.

Engagement and stewardship

Investors are also engaging more with portfolio companies on ESG issues, as is clear from the rising number of shareholder proposals being filed. This activity can be driven by their stewardship policies or fund managers’ investment mandates, and is in line with the increased regulatory focus on sustainability.

The upshot? Investment firms must either enhance their existing staff’s ESG know-how through training or bring in extra resources – or more likely both. Asset managers are, for instance, luring proven stewardship talent from asset owners.

All this mirrors the uptrend in hiring activity of chief sustainability officers and similar roles among corporates amid pressure from investors and regulators.

Engagement is, after all, a two-way street. A better understanding of international standards and best practices on sustainability among both investors and issuers will help build trust, create transparency and drive accountability, as a recent study by fund manager Schroders showed.

Legal and reputational risks

Having genuine ESG expertise and experience in place also helps financial firms to avoid legal and reputational pitfalls, and to strengthen their in-house sustainability know-how and culture.

Booming demand – and pay – for ESG talent has inevitably led researchers to warn of ‘competence greenwashing’: overstated claims of environmental competence or sustainability-related expertise.

This is true of corporate reporting in general and of asset managers’ own disclosures related to the products they sell. Poor-quality disclosures raise questions, create confusion among investors, and contribute to the perception of greenwashing, found a September 2023 report by CFA Institute.

The rise of litigation against ‘greenwashing’ – making untrue or overdone claims about the sustainability of a product, service or business – shows that regulators and society at large are wising up to the practice. One actually has to walk the talk, and to do that investors need staff with genuine skills throughout the firm.

Culture and retention

Institutions that demonstrate they are serious about tackling greenwashing find it is easier to add and retain staff, as well as to foster a culture and structure where ESG is accepted and becomes best practice more quickly. Doing so means investing in sustainability talent not just in the responsible investment team or the sustainability strategy department, but at all levels, including on the board.

The investment industry is fortunate that it already has a head-start on recruiting. Graduates feel more confident about the career prospects of finance than any other sector, according to the CFA Institute’s Graduate Outlook Survey 2023. Two years earlier, education had come out top.

But the financial sector also faces a perception problem. Nine out of 10 respondents consider it important to make a positive societal and environmental contribution through one’s career (see chart below). However, whereas 38% of respondents said a career as a doctor or scientist would make a positive social or environmental contribution, just 8% said the same about a job as an investment professional.

On the face of it, such thinking is understandable. However, it overlooks the influence that investors can have on how businesses approach climate change and other pressing environmental and social problems.

They won’t be able do that without the right human capital in place.

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