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Reporting gaps point to managers paying lip service on ESG

‘We would like to see these words being backed up more substantially by investment actions’

Despite significant strides being made in ESG reporting among asset managers, research has found several areas where meaningful progress is yet to be made.

Investment consultant Redington’s annual Sustainable Investment Survey found that over the past six months a quarter of asset managers were unable to evidence ESG considerations that influence buy or sell decisions.

This is despite 90% of asset managers stating that they integrate ESG considerations into their fundamental research, and 78% stating that they expect ESG integration to have an additive impact on financial performance.

Redington surveyed 112 global asset managers, covering 220 strategies and an aggregated $10trn in combined assets under management.

It also questioned asset managers on their stewardship and engagement policies, with results showing that 83% reported having a firm-wide stewardship and voting policy and, on average, this policy covered over 88% of assets under management.

However, the survey again found evidence that such progress on policies was not always being backed up by tangible actions.

For example, of those asset managers who stated they had a stewardship and voting policy covering all their assets under management, just 44% of those voted on 100% of resolutions and almost 10% did not exercise any voting rights at all.

“Given that almost all asset managers, across most asset classes, indicate that ESG factors influence their investment decisions at least sometimes, we would like to see these words being backed up more substantially by investment actions,” says Redington head of stewardship and sustainable investment strategy Paul Lee.

“Setting policies and processes is just the beginning. What’s really needed to further the sustainability agenda within the asset management community is a tangible link between ESG analysis and investment decisions.”

Success or lip service?

For independent wealth consultant Adrian Lowcock, the key to being deemed ‘successful’ in ESG reporting is in the detail.

“Asset managers need to document and incorporate ESG into the process. To some extent asset managers already consider some factors relating to ESG, but don’t always think in terms of ESG when making the final decision – it is just another component,” he explains. “So, it is often a case of making it explicit in the process and documentation, such as the questions they ask companies on ESG, ESG risks and considerations need to be separately included in a proposal.”

He adds that for larger groups it is a case of having an independent ESG team that focuses on the issues and can deliver specific ESG reports to the portfolio managers.

“This avoids the criticism of fund managers just paying lip service and, given the extent to which ESG is growing, shows commitment from the group,” he says.

Lowcock suggests firms such as Federated Hermes, Royal London and Liontrust are prime examples of those that have incorporated ESG into their culture.

ESG engagement – quality or quantity?

As part of the survey, Redington also analysed the level of engagement efforts across different strategies and asked asset managers to differentiate between “deep engagements”, which are classed as including three back-and-forth dialogues between a manager and a company, and “light engagements” that consist of fewer than three.

The results show a drastic difference on this engagement level between asset classes. Just 15% of equity engagements, for example, were deep, while on average, credit managers were not undertaking any engagement across 75% of their overall portfolios.

“Engagement is an incredibly powerful catalyst for positive and sustainable change. While it’s encouraging to see indications of a high level of thoughtfulness on the part of real asset managers, we would expect a higher proportion of deep engagements across equity strategies, too – especially given the asset managers’ level of influence as shareholders,” explains Redington head of manager research, Nick Samuels.

“It’s particularly surprising to see such a low proportion of credit portfolio holdings – 25% on average – facing engagement from asset managers. Credit investors are often uniquely equipped to be able to shift attitudes and practices.”

Differing ESG views is a good thing

Fairview Investing director Ben Yearsley, however, says that having differing views on ESG is a good thing.

“It’s the difference between allowing managers free reign to decide how important ESG is to them versus what is considered at a firm level. It’s healthy that there are differing opinions and how much or little ESG is considered when investing. Just because a firm has integrated ESG into their processes doesn’t mean every fund has to be ESG friendly.”

He cites Fidelity as an example: “Their analysts do ESG analysis on every company they cover, but the portfolio managers are free to decide for themselves whether it’s important or not within their own fund.”

Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021. Winner of Aegon Asset Management's Institutional Journalist of...