Fund Solutions

ESG Narratives Needed as well as Numbers

Research predicts new demands on asset managers, as clients’ sustainable investment priorities mature.

Investment managers can expect to be grilled in future by their clients on a widening range of ESG topics from public policy engagement to work towards the UN’s Sustainable Development Goals (SDGs), according to behavioural benchmark company Accomplish.

Institutional and intermediary clients’ sustainable investment demands are growing increasingly sophisticated, requiring managers to reappraise their skills and budget levels. “Product strategies may also need to evolve,” it added.

In a new piece of research, ‘ESG Related Client Behaviours’, Accomplish surveyed 41 asset managers, including global giants such as Allianz Global Investors, Federated Hermes and Fidelity International, about client and prospect behaviours on ESG-related themes in order to predict market direction over the next four to five years.

The results were analysed at the University of Zurich’s Center for Sustainable Finance, using a framework designed by Senior Fellow Harald Walkate to map organisational focus on ESG themes.

Adam Grainger, Accomplish’s Chief Executive, said the research warrants particular attention from asset managers as it reflects observed behaviours and actions by clients, rather than expressed opinions and feedback. “Actions speak louder than words,” he said.

“Dangerous” short-cuts

The research identified nine categories of client behaviour, starting with those most common among less experienced investors and moving up to those exhibited by those with a high level of experience in pursuing sustainable investment strategies.

First was the ‘cry for help’, described as “the desire for basic information and support because they know they do not understand ESG”. The next, called ‘scene setting’, involved “numbers-orientated fact-gathering: often closed questions that force a yes / no answer, or require a number, or a label”.

Then came “using international standards as short-cuts”, for example non-European Union clients using the categories established by the EU’s Sustainable Finance Disclosure Regulation (SFDR). “This can be dangerous,” said Grainger, noting that the regulation was conceived as the basis for disclosures by service providers rather than a fund-labelling regime.

The most frequently observed behaviours were found in the middle of the spectrum. Behaviours and actions grouped under ‘tell us how you do it’ were reported by 85% of asset managers, while almost all (98%) noted ‘appetite for new data’ among clients.

At the top end of the scale, the eighth category is called ‘we want to do it our way’. The report notes: “The common factor across these behaviours is the client’s desire to pursue their own objectives and impact the world in their own way.” Finally, the ninth category, identified by 34% of asset managers, is ‘are you walking the talk?’, described thus: “These behaviours saw clients turn the onus on the asset manager to explain their own ESG-related commitments and how they are living up to them.”

“Clients are asking ‘why?’ much more. Clients are increasingly interested in the narrative side of things, the stories to go with the numbers,” said Walkate.

Emerging priorities

The report predicts that client behaviours will increasingly migrate toward the top of the observed behaviour scale, reflecting greater market maturity and understanding of how best to integrate ESG factors into investment decision-making, Broadly, this would result in a shift away from mechanistic solutions, such as negative screening, and a broader interest in empirical and qualitative approaches.

This could manifest itself in institutional and intermediary clients focusing more on solutions that demonstrably deliver positive real-world outcomes, informed by a theory of change, and seeking explanations of investment relevance. Individual clients may show more interest in blended finance or aligning to SDGs, the report said.

To test the extent to which these emerging priorities were already informing client behaviours, Accomplish asked survey respondents to comment on the frequency of indicative phrases and terms in client conversations.

The common use of ‘materiality’ and ‘scenario analysis’ reported by managers suggests these are already prevalent topics, while scarce mentions of ‘divestment effectiveness assessment’ or ‘enlightened active ownership’ “is consistent with the view that, in general, they are future behaviours,” the report said.

Among the sustainable investment themes and concerns most likely to arise as client priorities in the near future were the monitoring of public policy by asset managers and their ability to offer impact-aligned or generating products. Accomplish suggested asset managers should expect to be asked ‘how are you tracking public policy signals that could drive investment risks and stranded assets, e.g. likelihood of carbon taxes for climate change?’ and ‘can you tell us what investment capabilities you have that can be mobilised to work towards all SDGs?’

“A long way to go”

A separate study, by UK-based investment consultancy Redington, suggested many asset managers were struggling to incorporate sustainability factors into their  investment decisions.

Based on inputs from 122 asset managers globally, Redington’s Sustainable Investment Survey 2022, found that 43% of managers could not provide an example of a sell decision driven by an ESG view, compared with 39% in the 2021 report. Further, 35% could not evidence an ESG-motivated buy decision, up from 26% last year.

“There is a long way to go when it comes to taking actions for real-world outcomes that are truly going to move the dial on some of the most challenging sustainability issues of our time,” said Nick Samuels, Head of Manager Research at Redington.

“While we would expect to see some variation between ambition and action, how can managers really drive the change that is needed when so many are unable to evidence specific allocation decisions that were influenced by ESG factors this past year?”

The survey also suggested limited positive impact through engagement efforts by asset managers. For less than half of ‘engagements for change’ by managers did the investee firm develop or implement a strategy for addressing the concern raised, with the most frequent outcome being an acknowledgement.

“This may be a stepping stone to future development but we really expect managers to have mechanisms in place to hold engaged entities to account,” said Paul Lee, Head of Stewardship and Sustainable Investment Strategy at Redington.

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