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ESG: Is the tail wagging the dog?

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18 May 2022

Do pension schemes rely on asset managers for ESG insight or make their manager selection based on it? Andrew Holt discovers what this means for asset owners.

ESG fiduciary

Do pension schemes rely on asset managers for ESG insight or make their manager selection based on it? Andrew Holt discovers what this means for asset owners.

ESG fiduciary

How asset owners approach environmental, social and governance (ESG) issues has come under the spotlight as there are significant differences in how they address the issue.

A study by consultant Chestnut Advisory says asset owners rely on asset managers for their ESG strategies. This seems an interesting insight, as should it be the asset owners who dictate their approach to sustainability issues?

The study states this is happening because asset managers are ahead of the game on ESG. Chestnut Advisory’s chief executive, Amanda Tepper, notes that it is asset managers, as well as consultants, who have developed different investment styles in this area and formed the thriving terrain that ESG investing is today.

But have asset managers done this because they were nudged by asset owners?

This in turn will set aside the ESG thought leader asset managers from the rest, Tepper said. “Over time we expect managers who are viewed as among the smartest on ESG issues to gain an edge over their competitors with investors who value their ESG expertise.”

This contrasts with a poll last year which presented a different picture: one of asset owners believing that many asset management products use ESG as a marketing gimmick that do not deliver on their stated objectives.

This highlights a clear lack of trust on ESG and has led to allegations of greenwashing amongst asset managers.

Limited practices

Another, more recent survey, questions, in part, the ESG work of asset owners: revealing that there is, in fact, limited ESG practices within asset owners’ portfolios in the US and Europe – with only a quarter integrating ESG scoring into their investment manager selection processes.

That said, this area of ESG is developing and there is no standard approach. So, asset owners cannot be blamed for having an incoherent approach in an area that is, by definition, still pretty incoherent.

In this study, asset owners said data gaps in company social and environmental performance reports remain their top concern: an issue that strikes at the heart of the ESG process and why efforts to measure it lack validity.

Sustainability role

Another study stated that the majority of asset owners say environmental and sustainability considerations play a major role in manager selection, turning the findings of the first study on its head. This has asset owners shunning managers that are not embracing the drive toward responsible investment.

What these often conflicting findings reveal is that ESG is a vitally important issue, but a lack of uniform approaches and measurements mean it is difficult to assess where we truly are in the ESG journey.

For asset owners it is something of a maze.

The UN Principles for Responsible Investment (PRI) has identified the importance of the ESG dynamic between asset owners and their external managers but has its own take on the issue: indicating it is important both parties work together on ESG-related investments and practices, but it is the asset owner that can shift the debate.

“Once asset owners understand and can articulate their ESG values and beliefs, they have a powerful voice to influence the mandates of investment managers,” it noted in its report.

“Having a consistent ESG approach that outlines clear expectations is critical in allowing investment managers to regularly focus on ESG factors in their investment decision process. Clear communication and transparency from asset owners to their investment managers was identified as key to increasing accountability,” the report read.

In an attempt to provide a transparency roadmap on the issue, late last year the CFA Institute released its Global ESG Disclosure Standards for Investment Products, providing a detailed list of recommended disclosures of ESG investments.

“This,” said the institute, “includes, but is not limited to, approaches that are often referred to as ESG integration, exclusion, screening, best-in-class, thematic, sustainability themed investing, impact investing and stewardship.”

As a transparent basis for ESG investments this is a good start, but these standards, like much else in ESG, are voluntary.

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