ESG analysis is on the rise, and is a source of both opportunity and risk to complement other fundamental analysis. It is an increasingly essential factor for fund selectors and investors to expect.
Over the course of 2020, our research team researched, interviewed and reviewed more than 60 asset management groups to assess their approach to ESG considerations and the extent to which they are embedded throughout their investment operations.
Pretty much every group we analysed is considering ESG seriously and either taking large strides or small steps to improve how they go about it. Some groups are, without doubt, a little late to the party. Others who are more established on their journey now have ESG factors embedded and integrated to varying degrees into their investment and portfolio management processes.
Encouragingly, we see more evidence of board and senior management engagement, particularly on the E and S of ESG. Many companies produce excellent corporate responsibility and stewardship reports, and statements documenting their own specific commitments to environmental and social targets within their own firms, such as targets for emissions and workplace best practice for their staff.
We have also seen more firms joining industry-wide collaboration initiatives acknowledging that collective engagement can be worthwhile. For example, Climate 100+ is an investor-led initiative to improve climate change governance, cut emissions and improve disclosure. Share Action, the UK Sustainable Investment and Finance Initiative, as well as The Investment Association working groups have also become increasingly popular.
The largest asset managers have the resources and scale to make a difference and most appear committed to doing this. A robust approach to ESG within a business has become an imperative as momentum has gathered in this area. Companies realise they will start to lose assets if they don’t keep in line with their peers or aspire to best practice.
Regulatory forces and demand pressure from institutional and retail clients are also pushing developments. Being a UN PRI signatory is pretty much standard now for any larger group and responsible investment (RI) teams and specialists are becoming the norm among asset management groups.
We also see evidence of growing teams, resources and influence. The size and structure of this resource can vary, but the common theme is one of close collaboration with fund managers to make sure ESG issues are integral to company analysis across the capital spectrum and embedded within the investment process.
RI specialists operate in different ways within different companies and mould to work within the investment culture of their own fund management teams. Their roles can be wide-ranging but, essentially, they support and encourage colleagues to embrace ESG issues. They help drive the ESG agenda, help to frame and deliver the RI strategy, train fund managers and lead or support fund managers in their engagement with companies and are often integral to the development of in-house tools and analytics. The growth in RI specialists at asset managers are important to support and help deliver change.
It can be more difficult for boutique companies to show the scale of resource their larger competitors’ evidence. However, that is not to say they take this any less seriously. Indeed, we find the same awareness of the importance of ESG in the smaller firms. They just implement things differently, sometimes more dynamically and lack the glossy reporting of a big company marketing machine.
At the individual fund level, we also note a greater awareness of ESG issues from the fund managers. This isn’t surprising. If an asset management firm is increasing resources and visibility on these issues there is an expectation that this will permeate to the practices of fund managers. There are times when this doesn’t happen or is harder to demonstrate. For example, passive funds, some multi-asset funds where asset allocation decisions dominate and some absolute return funds where derivatives are used extensively. There are also some individual fund managers who still pay lip service to the ESG agenda and remain sceptical.
This year we anticipate there will be progress across the industry in the development of on-desk analytics and tools, making information easier for investment teams to access. This should also help deliver improved fund reporting for investors too. This is an area where there is still room for much improvement.
As ESG factors become a mainstream part of the investment process, we expect to see even more responsible and sustainable investment fund launches and more funds coming to market with specific impact objectives. The tools and analytics being developed here are crucial to support fund buyers and investors with evidence that what funds are promising to do can actually be delivered.