US allocators and investors claim ESG factors “can provide better risk-adjusted returns” in the long-term, Cerulli reports.
An overwhelming proportion of US-based asset owners (88%) and investment consultants (77%) say ESG integration is “at least moderately important” in their asset manager selection process, according to a report published by research and consulting firm Cerulli Associates.
The report, titled ‘US Environmental, Social and Governance Investing 2020: Shifting environmental and social systems push asset managers to get more responsible’, collated data from a survey which identified asset managers are increasingly measured through an “ESG lens”.
“While each institutional investor and consultant varies in their approach to the manager selection and termination process and the level of importance placed on ESG capabilities, Cerulli’s research reveals that not having a sound ESG policy is not yet a deal breaker for most allocators, but it is clearly becoming more important to getting business and winning mandates,” the report added.
When selecting asset managers, asset owners most commonly assess the quality of ESG integration approach (29%), senior leadership accountability (28%), datasets used to inform decisions (26%) and active ownership records (25%).
With two-thirds of the 200 asset owners who responded to the survey revealing “they have an ESG integration process and consider ESG factors when selecting investment managers”, US asset managers are increasingly expected to meet client demands in the ESG space. More than four in ten (43%) asset owners require a “clearly documented approach”, whereas 56% may ask their asset manager about their ESG integration approach but have yet to make it a requirement.
However, more than one-third (39%) of institutional asset owners now score managers based on their ESG integration approach. For 54%, incorporating ESG considerations into their investment decisions is a conscious attempt to align their objectives with organisations’ values. Other reasons asset owners gave included reflecting stakeholder interest (44%), fiduciary duty (43%) and risk mitigation (45%).
Asset managers are relying on a variety of datasets – such as MSCI (67%), Bloomberg (65%) and CDP (51%) – to provide information to clients, the report highlighted. Due to a “lack of transparency of scores and ratings”, asset managers prefer to procure the raw data and then conduct in-house analysis before presenting findings to investors.
A vast majority (82%) of asset managers claimed they are reporting to asset owners on a number of ESG metrics, such as carbon footprint (71%), impact measurement and reporting (63%) and ESG pillar scores (51%).
“Allocators are digging deeper into asset managers’ diversity and inclusion policies and practices, collecting metrics around racial, ethnic, and gender diversity make-up at firms, particularly among senior leadership roles,” said Michele Giuditta, Director of Institutional at Cerulli, and lead on the report.
“The number of asset owners taking ESG criteria into account as part of their manager selection and termination process has steadily increased over the last five years. Managers advertising their ESG capabilities need to display consistency and commitment at the firm level, demonstrating how the firm incorporates ESG criteria and providing transparency into active ownership activities ─ proxy voting, engagement, and shareholder resolution activities ─ to show alignment with the firm’s stated beliefs and views.”