AMs Must Embed, Not Just Buy, ESG Expertise

Managers investing in sustainability offerings, but net zero ambitions still open to question.  

Asset managers buying in ESG-related expertise by acquiring specialist firms must also invest in their in-house culture and resources to attract sustainability-focused asset owners, according to Marisa Hall, Co-Head of the Thinking Ahead Institute (TAI). 

“Combining the sustainability expertise of small boutique firms with large asset managers can make a real difference when it comes to things like active engagement, due to their influence,” Hall told ESG Investor. 

“But this needs to be done at the same time as trying to develop their own resources and skillsets if they want to be seen as a truly sustainable manager. Asset owners want to believe firms are really living these values; a sustainability-focused culture can’t be bought. It has to go deeper than just bringing in talent.”  

An annual study of the largest 500 global asset managers by TAI, the sustainable investment research arm of consultancy firm WTW, found that the top 20 firms’ share of total assets increased from 44% in 2020 to 45.2% in 2021. The firms’ AUM increased by 13% to US$59.5 trillion. Overall, the discretionary AUM of all 500 managers amounted to US$131.7 trillion by the end of 2021, which is a 12-month 10.2% increase.  

Further, 218 asset managers included in the top 500 list ten years ago no longer feature, due to “the pace of competition, consolidation and some rebranding”, the report said. 

Traditional asset managers have been expanding into the ESG market through M&A activities to harness the benefits of scale,” it added.  

In August, US-based MetLife Investment Management announced it would be acquiring ESG-focused boutique Affirmative Investment Management. In April, UK asset manager Schroders bought a majority stake in Greencoat Capital, noting its focus on investing in large-scale renewable energy infrastructure. 

Hortense Bioy, Director of Sustainability Research at data provider Morningstar, said that sustainability-focused M&A activity is ultimately “a positive trend”. 

“Buying out ESG-focused firms strengthens large asset management’s commitment to ESG. It allows them to benefit from the acquiree’s ESG expertise more quickly and coherently than if they were looking to hire individual talents.” 

Asset managers are also demonstrating an increased focus on building out their existing capabilities, the TAI report said, adding that 76% of assessed managers have increased resources deployed to technology and big data, partly so they can fulfil increasing sustainability-related reporting requirements. Fifty-six percent of managers have also increased the number of minorities and women appointed to high positions. 

“Three big Cs” 

While asset managers have demonstrated their increasing commitment to sustainability, ongoing macroeconomic headwinds have limited increases in asset allocation. 

The TAI measured managers’ allocations to ESG principles and mandates in 2021. The former is defined as an investment approach where ESG criteria are partially or exclusively used in security selection. The latter concerns strategies that are fully integrating ESG.  

Assets allocated to ESG principles increased by 4.4% to US$2.5 trillion in 2021, but assets allocated to ESG mandates decreased by 0.2% (US$7.6 trillion). 

“We’re talking about the negative impact of the three big C’s: Covid, climate and conflict,” said TAI’s Hall.  

“These are all huge challenges asset managers have had to face; they’ve got to be able to balance and integrate sustainability while still meeting returns for investors.” 

Previous TAI research also noted that pension funds have been struggling to manage the dual challenge of economic volatility and incorporating long-term sustainability considerations into their investment decisions.  

Pension funds have therefore increased their expectations of both internal staff and external managers to deliver their investment strategies, TAI said. 

Net zero ambitions 

A growing number of asset managers are underlining their commitment to sustainability by setting targets for achieving net zero portfolio emissions. 

The TAI report referred to the growth of the Net Zero Asset Managers initiative (NZAM), which now has 273 signatories, collectively managing US$61.3 trillion in assets.  

“Collaboration is an important part of addressing big issues like climate change,” said Hall. “An initiative like NZAM serves as a catalyst for other asset managers to get serious and focus on sustainability.” 

As of the end of May, 83 members across three waves of signatories had committed US$16 trillion (39% of total assets) to being managed in line with achieving net zero by 2050 or sooner.  

By joining the initiative, signatories have sent a clear signal to their clients and the market at large that they acknowledge their responsibility in the transition to a net zero world,” said Morningstar’s Bioy. 

Within 12 months of joining the initiative, asset managers must submit interim targets and plans for the proportion of assets to be managed in line with reaching net zero by 2050 or sooner, which are scrutinised by investor networks, including the UN-convened Principles for Responsible Investment (PRI), before being approved and announced publicly. 

Reviewed every five years, the percentage of assets aligned with net zero will be gradually increased until 100% of assets are covered. Bioy says NZAM’s methodology offers only limited transparency to asset owners.  

She said: “The wide range of approaches to target-setting renders it impossible to make direct comparisons between asset managers, raising questions about the reliability of any of the commitments and decarbonisation targets. Investors would benefit from standardised approaches.” 

Bioy added that less than a fifth of NZAM members which have set targets so far have issued absolute emission reduction targets, which she said are harder to achieve than carbon intensity targets. 

“Several managers, including large ones like BlackRock, haven’t set emission reduction targets but said they aim to invest a portion of their assets in issuers with science-based targets,” she said. 

The interim targets for wave four of NZAM members were due to be published this summer, but will be announced alongside wave five next month during COP27 in Egypt, meaning that over 100 new targets will be added to the 83 set so far. 

“It is perhaps too early to draw any conclusion about the impact of NZAM,” Bioy told ESG Investor. 

“The lack of consistent guidance and standard methodologies is an impediment to success, in my view. But at the end of the day, what matters is the reduction of real-world emissions, and it will be a challenge to attribute that to any specific organisation anyway.”

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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