Honor Fell, CFA, Vice President of Responsible Investment at Redington and member of the ESG Working Group at the CFA Society UK, shares her insights on how asset managers can gain an advantage in managing ESG risks.
Over the course of 2019, signatories to the Principles of Responsible Investment (PRI) climbed inexorably closer to breaking the barrier of $90 trillion Assets Under Management [1]. Responsible Investment has become mainstream and an integral part of any manager selection exercise.
Investment in headcount for Responsible Investment teams, ESG data inputs and new product development is continuing at pace. It has been estimated that global spending on ESG indices has an annual growth rate of 37% [2].
As asset managers continue to invest in ESG integration, every pitch deck will have a slide or three covering the approach to Responsible Investment. The challenge for asset owners is how to differentiate between product offerings.
It’s clear that as asset managers increase the sophistication of their approach, researchers need to step up their scrutiny. In this blog I cover the four areas that the Redington Manager Research Team assess when deciding whether an asset manager has an advantage in managing ESG risks and opportunities relative to their peer group: integration; engagement; infrastructure and accountability.
Integration
Responsible Investment is much more effective when it’s part of the investment process, rather than carried out in parallel or tacked onto the end of an existing process. When understanding the approach an asset manager takes it is important to ask questions about the extent to which ESG information impacts decision making. We try to uncover greenwashing by asking these questions to multiple members of the investment team, and looking for evidence for ESG evaluation in research notes.
Key questions:
- Do you integrate environmental, social and corporate governance (“ESG”) factors into your investment process? Please describe.
- Do you have any examples of cases where ESG analysis has caused you to buy or sell an investment?
Engagement
Where it’s relevant to their investment approach asset managers should engage with companies and governments on behalf of their investors to promote good ESG practices and enhance financial sustainability. Engagement can take the form of voting at shareholder meetings or discussing and working with companies on areas which need to be improved. Moreover, this approach to stewardship should not be viewed as an activity for equity owners only, principles of good stewardship apply across asset classes including property assets and fixed income.
Key questions:
- How, and to what extent, does your firm engage on ESG issues with the entities in which you invest?
- What are the typical reasons behind the engagement? Please give examples.
Infrastructure and reporting
Global spending on ESG data was $505 million in 2018 and is expected to reach $745 million by 2020 [2]. However, purchasing data does not guarantee that ESG is being considered in the investment process. When speaking to Portfolio Managers and Analysts it’s important to understand whether ESG data and research is truly adding to the mosaic of data that an investment professional assesses before making a buy or sell decision. Well integrated and readily available ESG data also means that reporting systems should be set up to enable internal and external ESG reporting.
- Key questions:
How do you access ESG research and data? e.g. is it integrated into your research platform? - What kind of client reporting do you produce?
Accountability
To improve our confidence that ESG is truly being integrated within an investment firm, further detailed qualitative research needs to be carried out. This may include what the C-suite is talking about, as well as how their agenda is spread through the organisation. Cultural alignment with ESG integration can be assessed through meeting with employees at all seniority levels as well as understanding the interaction between dedicated ESG teams and Portfolio Managers. A clear link between performance objectives and ESG integration can also be a sign of organisational commitment to Responsible Investment.
Key questions:
- Are ESG integration and engagement activities linked to renumeration?
- How do you evaluate and monitor compliance with and value added from your ESG policy?
Responsible Investment: part and parcel of manager selection
Assessment of an asset manager’s approach to Responsible Investment is an integral part of manager selection. In order to differentiate between asset managers and investment products it’s important to take the time to dig into the four key areas of integration; engagement; infrastructure and accountability.
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References
[1] https://www.unpri.org/pri
[2] http://www.opimas.com/research/428/detail/
Interested in learning more about the CFA UK ESG certificate? Find out more here.
This article was written by Honor Fell, CFA, Vice President, Responsible Investment at Redington and member of the CFA UK ESG Working Group. If you too would like to join the conversation and share your views on the development of ESG investing and its impact on our industry, please contact marketing@cfauk.org to enquire about editorial opportunities.
