It appears to be morning in AM for ESG. Asset Managers are waking up to a moment of truth for Environmental, Social, and Governance principles in their investment activities.

Obviously, corporations and financial institutions have been talking about ESG for years. It’s hard to find corporate website without language like, “We place fiduciary and ESG principles at the pinnacle of our corporate actions.” Annual reports often contain a section entitled Sustainability which feature glossy photo of a tree-lined park with a sole family (of 3 usually) picnicking among the cicadas. In fact, it seems like just here in Japan on an almost daily basis another corporation is announcing Net-Zero targets.

However, actually executing on ESG principles requires more than buzzwords in brochures, of course. The asset management industry in particular appears to be taking ESG more seriously now. Anecdotally, many of such asset managers with whom I’ve interacted fall into two broad categories.

The reporting phase

The most abundant group appears to be in the stock-taking phase. They are trying to determine their ESG compliance and exposure among their vast array of holdings. This effort involves a data-gathering effort and subsequent reporting procedure, potentially extensive.

The action phase

A second, smaller group is more advanced along the spectrum. These forward-thinking firms, perhaps in parallel with the stock-taking phase, are also exploring future opportunities which could be unleashed by integrating ESG principles more deeply into their processes and business models. Beyond mere reporting, they may try to influence the ESG behavior of their portfolio holdings.

For the former category, traditional audit firms like the Big 4, or large consulting shops, probably represent the most relevant source for guidance. In terms of the second category of opportunity exploration, a newer pool of specialized consultants and thought leaders is emerging.

Executing on ESG and attaining such targets can be daunting. We too are still grappling with the most appropriate degree of ESG implementation in our own small VC fund. For those asset managers who aspire to deepen their expertise on the topic, I’d be happy to connect you with specialists in our network from both categories, advisors who have assisted us and some of our LPs as well.