Many Asset Managers Still in Starting Blocks in Race for ESG Integration

Olympics-themed tender highlights laggards, with many stumbling over data hurdles through lack of home-grown expertise.

Asset managers must address “the most basic and serious gaps” in their ESG propositions or risk undermining the credibility of the sustainable investment sector, according to a new UK-focused analysis of proposals from 60 managers with combined £15 trillion AUM.

The ‘State of the Sector 2020’ report was released by Friends Provident Foundation, one of three asset owners in the UK charitable sector which recently conducted an ‘ESG Investing Olympics’ manager selection process. The other two participating charities were the Blagrave Trust and the Joffe Charitable Trust.

The three charities issued a £33.5 million investment mandate, asking only for managers to “impress” them on ESG integration and impact. The competition was won by Cazenove Capital, a unit of Schroders, which launched its winning entry, the Cazenove Sustainable Growth Fund, to charity and private clients today.

In the selection process, a shortlist of five managers was drawn up based on an assessment of indicators of ESG integration, including stock selection, voting record, engagement and escalation, exclusions, in-house expertise, intentional social and environmental impact and impact reporting.

The report said many of the submissions failed to evidence basic standards of ESG integration. Although some submissions were of very high quality, several from large asset managers provided little evidence of in-house ESG expertise or process, while boutiques often fell short on engagement.

Among a series of recommendations, the report said managers should adopt a default position of voting in favour of ESG resolutions tabled at AGMs, acting on a ‘comply-or-explain’ basis.

It also proposed that managers focus their ESG-based engagements with investee companies on achieving near-term change, rather than seeking compliance with disclosure requirements and accepting distant targets, for example on emissions reduction.

The integration of social factors – the S in ESG – was considered to be a particular weakness by the report, which proposed increased efforts by managers on both stock selection and shareholder engagement.

Although the report acknowledged the difficulties of integrating social factors into investment decisions, due to lack of comparable and consistent data, it argued for managers to invest in deeper in-house expertise to reduce over-reliance on third-party data driven indices.

The report also called for managers to have clear policies for escalation of engagement and regular disclosure of holdings, voting records and engagement activity.

Report author Colin Baines, Investment Engagement Manager at Friends Provident Foundation, said many managers are aware of the present shortcomings of their ESG offerings and capabilities, and warned of damage to the reputation of the sector as a whole from “piecemeal or tokenistic” approaches.

“Many asset managers do not currently meet standards which we would consider to be basic tenets of ESG, but many were willing to adhere to win the tender. The best proposals met and exceeded them, but for some winning would have meant the type of behavioural change that is required across the market if it is to be authentic,” he added.

“It would appear the only barrier to meeting these standards is the will to do it.”

In a webinar held today to accompany the publication of the report, Baines said the majority of the shortlisted funds, including the winner, were multi-asset funds which combined a core equity allocation with range of supplementary positions to achieve impact.

The Cazenove Sustainable Growth Fund will be approximately 45% invested in the Schroder Global Sustainable Growth strategy, complemented with just over a quarter in “satellite positions” in specialist thematic and impact managers.

According to Kate Rogers, Global Head of Sustainability and Co-Head of Charities at Cazenove, the winning entry which will use parent Schroders’ proprietary analytics to quantify impact.

“We estimate that companies within the portfolio at launch generate less than half of the carbon emissions, and four times the social benefit, of companies in a global equity index,” she said.

“With a shared vision, a high degree of transparency and a collaborative approach, we are bringing together investors and managers to drive climate and social action and deliver profit with purpose.”

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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