Environmental, social, and governance (ESG) regulations are becoming more fragmented. Recent market and policy shifts have forced many asset managers to rethink their ESG integration strategies as they move forward.

For example, China is working to reduce its environmental impact. The EU has updated its taxonomy rules to do no harm while increasing sustainability. Meanwhile, the SEC has voted to end its defense of climate disclosure rules.

If you’re an asset manager, you might be wondering: How can you update your approach to ESG and better respond to increasing investor demands and scrutiny?

Below, we explore six failproof ESG integration strategies that will not only keep you on track but also put you ahead of the curve.

1. Analyze ESG factors to improve your investment strategies

Many asset managers are focusing on ESG factors by thinking critically about how they can affect their overall investment strategies. 

Why have ESG factors changed?

ESG factors had a brief moment in the sun shortly after the pandemic. Countries began taking climate change more seriously, and people started to question the shortcomings of the systems they had grown up with. 

But political backlash — and the backlash to that backlash — has since led to the fragmentation of ESG policies around the world.

Do investors still care about ESG?

Yes, investors still care about environmental, social, and governance factors. With so much political noise, it’s easy to overlook the significant impact ESG factors can have on investment performance. 

Thinking about ESG can help increase risk mitigation and improve client relationships. Clients are increasingly interested in investments that reflect their values, particularly younger investors who care about climate change and sustainability. They want their investments to align with their personal and ethical values. 

Why asset managers should analyze ESG factors

In the United States, where regulatory oversight is being abandoned, the responsibility is now on asset managers to improve their ESG integration strategies accurately.

With the increased focus on how ESG affects investments, asset managers have tremendous freedom to use unique investment approaches. 

Sound investment practices that consider ESG will lead to: 

• Better investment performance

• Better risk management

• Better client relationships

Ultimately, the integration of ESG factors and stewardship creates greater outcomes for asset managers and investors alike.

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2. Use ESG filters to build portfolios

Asset managers can set specific ESG parameters to define their investment universe. This helps them make stronger decisions about which companies to include.

Here’s how it works:

• Define ESG criteria for screening: Develop parameters to filter potential investments before deeper analysis.

• Set benchmarks: Identify companies that meet or exceed standards for environmental or social factors.

• Flag problematic companies: Apply exclusions to any firms with a history of corporate governance issues.

Intensifying regulatory pressures

Stringent ESG regulations and political pressures worldwide are forcing asset managers to rethink their approach to ESG factors.

This creates a paradox. Even in countries that have pulled back from regulations, asset managers need to work harder than before.

That’s because without governmental bodies enforcing disclosure requirements, the responsibility falls to asset managers. They must proactively gather ESG data and incorporate it into their products.

Shifting from risk management to value creation

The ESG heyday of 2020-2022 focused heavily on risk mitigation. That argument still holds water.

Asset managers are starting to think bigger, using ESG factors to create value:

• Moving beyond mandatory reporting requirements

• Focusing on financial materiality

• Understanding how ESG factors impact both risk and return

• Using ESG data to inform better investment decisions

• Incorporating ESG factors into valuation models

• Building stronger portfolios

Shifting from risk management to value creation has led to real opportunities. Investors who successfully take advantage of ESG data can gain competitive advantages in portfolio construction and performance.

3. Environmental factors: rethinking the “E” in ESG strategy

Environmental issues are having a greater impact on investment strategies than ever before. 

Take hurricane tracking as an example. As the US limits its ability to track hurricanes, this creates new risks for investors seeking exposure to products or industries in hurricane-prone areas. Sustainable investments have also surged in importance in recent years. Asset managers must now factor in:

• Climate regulations driving new environmental metrics

• Investment shifts from carbon avoidance to actual climate solutions

From carbon credits to climate solutions

In the past, ESG investors often concentrated on carbon credits or companies that prioritized lower CO2 emissions. Today, investors want broader, more impactful solutions. 

China is a real-world example, using innovative approaches to tackle its energy demands. The country is exploring cold fusion technology while also expanding renewable capacity, adding 277 gigawatts of solar power output to its grid in 2024 alone.

Key environmental investment areas

When thinking about the “E” in ESG, asset managers should consider investing in companies and funds that care about:

• Resource scarcity

• Pollution

• Reducing carbon emissions

• Clean energy technologies and renewable energy

• Becoming more environmentally responsible

• Monitoring supply chain sustainability practices

Even in places where government-mandated reporting has become more relaxed, you can improve your reporting and transparency to attract investors who value clear, straightforward environmental commitments.

4. Social factors: rethinking the “S” in ESG integration

Much like environmental factors, social factors impact both financial performance and credibility. Incorporating ESG principles for responsible investment ensures that financially material risks and opportunities receive proper due diligence. 

Asset managers should always consider social movements and geopolitical tensions when weighing social factors.

Social movements

Social movements have gained prominence in recent years. As people around the world express frustration with the status quo, new social ideas can emerge — for good or for ill. 

Asset managers need to keep their finger on the pulse of these trends. Companies that understand social movements outperform those that misread public sentiment.

Case in point: Target’s stock dropped 28% after bowing to anti-DEI pressures, while rival Costco took the opposite approach and saw a 51% surge.

Geopolitical tensions

Shifting global dynamics and increased geopolitical tensions have created market instability. This environment not only fuels social movements but also generates volatile market conditions.

Questions asset managers need to ask themselves:

• What will the US trade wars mean long-term? 

• Which countries will become tomorrow’s global leaders? 

• How should geopolitical forecasts influence long-term strategies?

• How can they position portfolios for success amid a changing world order?

Key social investment areas

When approaching the “S” in ESG, consider material ESG issues and invest in companies or funds that focus on:

• Human rights, including diversity and inclusion

• Product quality and safety

• Labor standards

• Geopolitical stability in both existing and emerging markets

• How companies treat their employees

• Community engagement, including supporting local charities and development initiatives 

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5. Governance factors: rethinking the “G” is ESG integration

Strong corporate governance practices are essential for building trust with stakeholders, current investors, and potential investors. 

Asset managers must ensure they meet all expectations surrounding: 

• Defined roles and responsibilities

• Training and education programs

• Transparent reporting standards 

Governance standards are tightening

The companies you invest in should understand that governance standards are tightening in response to high-profile corporate failures. 

As an asset manager, make sure you’re prioritizing companies with an increased focus on board diversity and executive compensation transparency.

Board diversity matters. Diverse boards consistently outperform homogenous ones. They represent broader experiences, leading to more dynamic thinking and better decision-making processes.

Key governance investment criteria

When evaluating the “G” in ESG, think about investing in companies and funds that:

• Have qualified board members in place for proper oversight

• Maintain transparency in their financial reporting

• Maintain practices to prevent bribery and corruption

• Comply with all laws and regulations, including environmental and social regulations

Asset managers must also evaluate the governance practices of their own partners and service providers. Consider working with providers who demonstrate active ownership principles and can support your investment analysis needs.

For example, VettaFi adheres to the IOSCO Principles for Financial Benchmarks. This is critical for index partners because it ensures your partnership is in line with your governance commitments.

With shifting regulations, due diligence must extend to your partners. A provider who adheres to strong governance principles builds integrity into your product's foundation, mitigating risk and reinforcing investor confidence from the ground up.

- Jack Eisenreich, Director of Index Product Development, TMX VettaFi

6. Maintain an ESG integration strategy for continuous improvement

Real-time data is essential for proper ESG monitoring. Past compliance doesn’t guarantee future compliance. 

Asset managers must stay abreast of how companies are changing, which means leveraging real-time data and monitoring systems.

When regulations change overnight

Regulations are dynamic and can change dramatically without warning. When political power changes hands, policies often follow suit. 

Here’s how you can keep up:

• Monitor regulatory shifts as they happen

• Track how other firms react to changes

• Adjust your strategies accordingly  

Why “set it and forget it” doesn’t work

Adding ESG considerations to your investment process is not enough. 

Asset managers must continuously monitor ESG-related developments. Best practices include:

• Analyzing and assessing ESG metrics

• Ensuring progress toward ESG goals 

• Verifying their ESG performance meets or exceeds stakeholder expectations

• Conducting in-depth reviews of material ESG factors across all asset classes, including fixed income

In addition to assessing how they’ve integrated their own ESG principles into the decision-making process, asset managers should conduct ongoing due diligence. Maintain ESG practices over time, keep pace with evolving regulations, and adhere to updated ESG principles.

The bottom line?

ESG integration requires active, ongoing management. 

Opening the window of opportunity

Right now, ESG regulations are all over the map. This presents an opportunity. 

Climate change, social movements, and government mandates are reshaping markets whether we like it or not. You can either get ahead of these forces or spend your time reacting to them.

While other asset managers pull back in response to environmental, social, and political uncertainty, you can build stronger ESG frameworks to help you gain ground and stay ahead. 

Asset managers who understand how to use ESG data integration will see real advantages in investment performance, client relationships, and risk management. Learn more about how VettaFi’s index services can build and strengthen your product set.