‘Dragons’ Den’ competition reveals gaps between fund- and firm-level practices by asset managers.
A recent benchmarking project conducted by Canadian asset owners found a marked gap between the fund-level disclosures of asset managers offering sustainable investments and evidence of firm-level commitment to and understanding of ESG integration.
The group of nine endowments, foundations and trusts awarded a C$104.5 million (US$78.08 million) mandate to the highest rated of the 60 asset managers that entered the ‘Dragons Den’-style competition. They also published a ‘State of the Industry’ report, which highlighted widespread shortcomings in firm-level disclosures and engagement escalation, alongside a general improvement in the availability of sustainability-focused fund offerings to Canadian asset owners.
Éric St-Pierre, Executive Director of the Trottier Family Foundation, one of the competition organisers, told ESG Investor that linking executive compensation to sustainability sent a strong message to institutional clients on how deeply ESG factors were integrated into decision-making and informing culture at asset management firms.
“Once you’re linking compensation to ESG, you’re sending a message to the entire firm that you’re not just creating one-off products for a particular client,” he said.
However, the vast majority of Canadian asset managers have not made this step, with just 15% of competition entrants outlining a clear compensation scheme linked to ESG integration and performance.
St-Pierre said the competition would influence future manager selection and monitoring processes at Trottier, founded in 2000, which invests in projects to promote science, education, health and the environment, including an impact investment programme.
“For Trottier, assessing where firms are in terms of shareholder engagement is one of the key takeaways,” he said. “But we will also be asking managers about linking compensation to impact, as well as trying to better assess the members of their investment teams.”
“Lack of coordination”
The competition sought to evaluate ESG integration within asset managers’ investment processes and stewardship activities, “with a consideration of the firm and fund’s ESG objectives and approach to achieving them”.
While its final report commended the participating managers on quality of governance relating to ESG integration, as well as research and due diligence, it noted several shortcomings, with large firms criticised for submitting “incoherent proposals”. Smaller and newer entrants were praised for increasing the breadth and depth of the Canadian market.
Low rankings stemmed partly from “a lack of coordination between marketing and investment teams”, which may have also contributed to several applications focusing too closely on the ‘why’ rather than the ‘how’ of operationalising ESG integration and stewardship.
The report emphasised that managers needed to demonstrate strong alignment between fund- and firm-level practices to establish the “credibility and cohesion” of their ESG integration efforts.
“There is still work to be done by asset managers to ensure ESG considerations and sound responsible investment practices are integrated throughout the organisation, not just in products labelled as ‘ESG’ or ‘sustainable’,” it said.
The assessment process encompassed several ways in which firms could demonstrate leadership and commitment in ESG integration, such as participation in collaborative engagement initiatives, as well as the nature of their own stewardship activities.
Criteria covered governance aspects of stewardship and engagement, including outsourcing of voting to proxy advisors and the remit of stewardship committees, as well as their records of voting in line with company management.
Just over a third (34%) of managers demonstrated use of formalised engagement processes with an explicit integration of ESG factors, the report found, while just 22% were tracking outcomes of their engagement activities.
Challenges for asset owners
Trottier’s St-Pierre said the exercise underlined the importance of stewardship to effective ESG integration, but also the scale of the challenge faced by asset owners in identifying the most suitable partners and solutions to meet their specific needs in a fast-growing market.
“It can be confusing. We need more robust taxonomies, more transparency, and better standards and labels. We need to better identify what we mean by ESG,” he said.
The report recommended that asset owners develop “sophisticated assessments” for selecting and monitoring their managers to better understand how they operationalise ESG integration and stewardship, and to clarify their expectations on stewardship. Managers were advised to provide “transparent and tangible” information on how investment strategies are being implemented.
According to the organisers, at least part of the motivation for launching the competition was the absence of recognised standards and definitions in the Canadian market for sustainable investment offerings. St-Pierre said the exercise could only go so far in helping Canadian asset owners to navigate the field and said accelerated regulatory action on fund labelling was needed as well as other aspects of regulation.
In January, the Canadian Securities Administrators (CSA) published guidance to fund managers on enhancing ESG disclosures and ensuring transparency and alignment between the marketing of ESG-related funds and the incorporation of ESG factors into investment decisions.
Environmental groups recently called on the Canadian government to step up its efforts to align the country’s finance sector with its net zero goals, including a requirement for credible climate plans from financial firms, pension funds, insurance companies, federally regulated large corporations and Crown corporations.
The competition required asset managers to demonstrate the most robust ESG-integrated investment approaches within either equity and/or fixed income, alternatives or multi-asset class categories. The approach taken by the organisers was adapted from the ESG Investing Olympics, an exercise conducted by Friends Provident Foundation and partners in 2020.
Whittled down from the initial 60 responses to an RFP sent to 160 managers, 11 shortlisted finalists were asked to pitch to and answer questions from a panel of judges at a live event in June, which included Barbara Zvan, CEO of University Pension Plan, and Chair of the steering committee of Climate Engagement Canada.
The initial entries were assessed on both ESG and financial performance by ESG advisory firm Milani and Normandin Beaudry, an investment consultant and actuary, with each of the co-investing organisers having a final say on allocations, based on their own goals and criteria. The winning asset managers included Alphafixe, Rally Assets, Jarislowsky Fraser, Schroders, UBS, Manulife and PH&N Institutional.
A number of impact investing solutions were entered for the competition, but none were regarded as having sufficiently strong ESG integration and stewardship practices to win a share of the mandate. However, an impact fund won a special audience choice award. The organisers said they regarded ESG integration and impact as overlapping but distinct, rather than mutually exclusive areas of the market.
Organisers of the Canadian competition included the Concordia University Foundation, the Skagit Environmental Endowment Commission, the Foundation of Greater Montreal, the Sitka Foundation, the Consecon Foundation and the McConnell Foundation.