Podcast Summary: Tamara Close, CFA: The Evolution of ESG Practices for Institutional Investors

Podcast Information:

• Title: The Sustainability Story
• Host/Author: CFA Institute
• Episode: Tamara Close, CFA: The Evolution of ESG Practices for Institutional Investors
• Release Date: June 9, 2025
• Description: An in-depth conversation with Tamara Close, Senior Director of ESG Advisory for the PETRA Funds Group, exploring the transformation of ESG practices among institutional investors.

1. Introduction

In this episode of "The Sustainability Story" podcast, hosted by Nicole Garrick, Tamara Close, CFA, shares her extensive experience and insights into the evolving landscape of Environmental, Social, and Governance (ESG) practices among institutional investors. The discussion delves into the historical shifts, current trends, and future projections of sustainable finance, emphasizing how ESG considerations are becoming integral to investment strategies.

2. Tamara Close's Sustainability Journey

Tamara Close recounts her unexpected entry into the field of sustainable finance over a decade ago while working at PSP Investments, a prominent Canadian pension fund. Initially tasked with liaising with the responsible investing team, Tamara's curiosity led her to delve deeply into ESG and sustainable finance.

Tamara Close [01:40]: “I started researching this a bit. And you know, when you start looking at these issues, environmental, social and governance issues, you realize how material these issues could be to the financial performance of a company or an investment.”

Her dedication led her to pursue academic work and certifications, positioning her as a thought leader in ESG integration. Tamara foresaw ESG becoming the next paradigm shift in finance, analogous to past shifts in market risk assessment post the 1987 crash and the 2008 financial crisis.

3. Evolution of ESG Practices Among Institutional Investors

Tamara outlines the progressive stages of ESG adoption among institutional investors:

• Responsible Investment Phase (2015-2016): Focused on stewardship, including proxy voting, engagement with companies, and exclusionary practices, primarily in public markets.

• ESG Integration Phase (Around 2019): Institutional investors began incorporating ESG factors into investment decisions across all asset classes. This period saw the emergence of total fund or portfolio approaches, where risks and exposures were assessed holistically rather than by individual asset class.

• Future Proofing and Impact Creation Phase (Present): Emphasis shifts to mitigating systemic ESG risks and leveraging ESG opportunities to create real-world impact. Institutional investors are increasingly allocating capital to climate solutions and sustainable opportunities.

Tamara Close [05:25]: “ESGs have really moved from more of a back office activity to that middle office risk activity and now to the front office.”

4. ESG as Both Risk Management and Value Creation

Institutional investors perceive ESG factors as dual pathways:

• Risk Management: Identifying and mitigating ESG-related risks that could affect financial performance.

• Value Creation: Leveraging ESG opportunities to enhance long-term value and create positive societal impact.

Tamara emphasizes the shift from seeing ESG as a compliance or exclusionary tool to integrating it seamlessly into investment strategies for both risk mitigation and value enhancement.

5. Regional Differences and Regulatory Influence

Tamara discusses the varying approaches to ESG across different regions, influenced heavily by local regulations:

• United States: Institutional investors, especially smaller and mid-sized ones, may require less ESG information due to the current political climate. However, larger investors are increasingly demanding detailed ESG disclosures.

• European Union and United Kingdom: Stricter regulatory frameworks like the Sustainable Finance Disclosure Regulation (SFDR) and the Sustainability Disclosure Requirements (SDR) compel more comprehensive ESG reporting and transparency.

• Canada and Pacific Regions: Similar to the EU and UK, with proactive regulatory environments pushing for enhanced ESG integration.

Tamara Close [11:37]: “Having regulations in place is certainly helpful to move the market forward. It brings compliance departments into the mix, it opens up operating and strategic capital for sustainability initiatives.”

Additionally, even in regions with fewer regulations, large institutional investors act as de facto regulators, setting high ESG standards and expectations for asset managers.

6. ESG in Public vs. Private Markets

The approach to ESG differs significantly between public and private markets:

• Public Markets:

  • Risk Management Focus: Due to the availability of extensive ESG data and higher liquidity, ESG integration serves primarily as a risk management tool.
  • Data Availability: Long-standing ESG data provision makes it easier to benchmark and assess sustainability characteristics.

• Private Markets:

  • Impact Creation Focus: Institutional investors have greater influence, often holding board seats, enabling them to drive strategic and operational changes.
  • Depth of Analysis: Private market managers tend to conduct more in-depth ESG analysis independently, as third-party ESG scores are less available.

Tamara Close [19:00]: “Public markets has almost become more of a risk management play... whereas on the private market side, it's become really a place where institutional investors can really create impact.”

7. Expectations from Asset Managers

As ESG becomes more embedded in investment strategies, institutional investors have heightened expectations from asset managers:

• Increased Data Requests: Managers should anticipate requests for granular ESG data, covering a wide range of issues beyond just carbon emissions, including supply chain impacts and biodiversity risks.

• Transparency and Actionable Insights: Beyond data collection, investors expect managers to demonstrate how they utilize ESG data to mitigate risks and capitalize on opportunities. This includes evidence-based strategies and measurable outcomes.

Tamara Close [20:27]: “Managers should expect to provide more transparency and expect to provide more evidence and outcomes.”

8. Key Questions for Asset Managers from Investors

Tamara identifies three pivotal questions institutional investors should pose to asset managers to assess their ESG integration maturity:

1. What are the top ESG risks or exposures of the fund?

   • Sophisticated Managers: Provide detailed, specific ESG issues tied to geographies or industries.
   • Less Sophisticated Managers: Offer broad statements like “climate change.”

2. How did you identify these ESG risks?

   • Emphasis on materiality from both financial and stakeholder perspectives, utilizing relevant standards and frameworks.

3. What are you doing about these ESG risks?

   • Detailed explanations of mitigation strategies and how managers are leveraging ESG opportunities, supported by metrics, KPIs, and progress reports.

Tamara Close [23:44]: “Three key questions that are quite short but can be sufficient to allow an investor to understand the level of maturity of a manager's ESG integration practices.”

9. Future Outlook: From ESG Hype to Maturity

Looking ahead, Tamara envisions the ESG landscape transitioning from its current state of heightened interest and broad commitments to a phase of deeper, more structured integration:

• Decreasing Hype: Moving past the peak of ESG enthusiasm characterized by extensive pledges and voluminous reports.

• Implementation Focus: Embedding sustainability into core business and investment strategies with measurable and impactful actions.

• ESG Maturity: Achieving a balance where ESG considerations are fully integrated into financial analyses and decision-making processes.

• Full Financial Integration: In the next five to ten years, ESG factors will be seamlessly incorporated into all financial assessments, driving both risk management and value creation.

Tamara Close [27:40]: “The next few years will be about the maturity of ESG or sustainability. From ESG hype to ESG maturity, and then full financial integration of ESG factors.”

10. Conclusion

Tamara Close's insightful discussion highlights the significant evolution of ESG practices among institutional investors. From initial responsible investment approaches to comprehensive ESG integration and impact creation, the journey reflects a broader transformation in the finance industry toward sustainability. Regional regulatory differences and the distinct dynamics of public versus private markets further shape ESG strategies. As the industry matures, transparency, data-driven decision-making, and tangible outcomes will become paramount, paving the way for ESG to become an inseparable part of financial integration.

Final Remarks:

• Host Nicole Garrick encapsulates the conversation by emphasizing the transition from ESG hype to meaningful implementation, stressing the importance of transparency and outcome-focused strategies in achieving sustainable investment goals.

Nicole Garrick [29:01]: “We can expect the market to continue to evolve from ESG hype to more of an implementation focus as the market matures and we look to achieve full financial integration of ESG information.”

Tamara Close’s expertise underscores the critical role institutional investors and asset managers play in driving the sustainable finance agenda forward, ensuring that ESG factors not only mitigate risks but also unlock new avenues for value creation and positive societal impact.