While there may be some doubt over the financial service industry’s capability in the ESG department, fund managers themselves are quick to espouse their responsible investment merits.
Oulton says: “It is hard to find an asset manager that would say [ESG is] irrelevant to their business. They would be an exception today which might have not have been the case pre-financial crisis.”
A quick look at the number of signatories to the United Nations Principles for Responsible Investment (UNPRI), which is a joint initiative to drive good corporate governance, reveals 743 investment managers on the list. The huge amount of assets under management is also testament to a burgeoning ESG interest.
According to the Global Sustainable Investment Alliance (GSIA), at least $13.6trn (£9.02trn) of professionally managed assets incorporate ESG concerns into their investment selection and management of which 65% is based in Europe.
Different strokes
But how asset managers implement an ESG policy into their overall investment strategy varies tremendously. The GSIA found the most common strategy used globally is negative screening, accounting for $8.3trn of assets, while corporate engagement and shareholder action accounts for $4.7trn.
In the UK, engagement has become a preferred tool for asset managers and pension funds keen to avoid any conflict of interest which may arise when excluding certain sectors. However, First State’s Oulton says the fear that responsible investment means ethical screening and is in some way a breach of fiduciary duty is overblown.
“There is a misconception about that; it’s more of perception than a reality. It’s not the case. [Concerns about breaching fiduciary duty] have held back many trustees’ views of enhancing their thinking around responsible investment,” Oulton says.
A fine balance
In fact, ESG has become so entrenched with some investors that ignoring these issues could in itself become a breach of fiduciary duty.
Tim Creed, managing director at private equity firm Adveq, says: “There is very clear evidence that firms with better governance perform better. With regards to environmental and social issues these have been analysed for a shorter period of time and therefore there is less evidence but we have anecdotal examples of where benefits have been made.”
Neither Adveq nor First State employs a negative screening policy, however, favouring engagement with investee firms instead. SVM, an asset manager, does employ screening in its All Europe SRI fund, choosing to exclude pornography, tobacco and armaments. Yet explaining the rationale behind excluding these specific sectors does not come easy.
Neil Veitch, co-manager of the SVM SRI fund, says: “It’s a difficult question and there is no perfect answer. We consider those three areas so socially abhorrent to any investor that it warranted excluding them completely. It is a fine balance and I am not sure we’ve got that completely right but we looked at the universe and decided we wouldn’t feel comfortable investing in those areas.”
Proving that one man’s meat is another man’s poison, SVM does invest in gambling companies but Veitch says “gambling per se does not have the same impact on individuals’ lifestyle and health as tobacco does”.
All about performance
Whether a fund manager chooses to screen, engage or use a combination of both will be largely irrelevant to investors if their performance is not up to scratch. The SVM SRI All Europe fund returned 12.4% in the year to 31 March outperforming its benchmark of the FTSE World Index by 2.4%.
It is this performance, Veitch says, that is the key to securing investors while engagement and screening policies are of secondary concern. “The hook is the performance and then we get into the discussion around what our views are on ESG,” Veitch says.
But fund managers cannot afford to rest on their laurels if responsible investment is to remain fruitful.
A 2012 survey of ethical funds conducted by Share Action (formerly FairPensions) found “many providers seem to be stuck in the past applying a traditional screening approach to an outdated set of ethical priorities”.
Driving the agenda
Additionally, Neate at KMPG says the investment management industry is “15 to 20 years behind the world of public companies when it comes to thinking about responsibility”, and argues investment managers should do more to drive the ESG agenda.
“Over the next five to 10 years the forwardthinking, fleet of foot in the corporate world, and therefore in the investment world, will benefit from taking the responsible [investment] agenda seriously,” he says. “They will maintain their reputation and performance and therefore maintain their clients. The corollary of this is that those that don’t get engaged, don’t plan and don’t think it through will lose reputation, performance and clients.”
In particular, there is growing evidence that those companies focusing on the social and environmental issues alongside governance will be the success stories of the future.
Oulton says: “There will be an emergence of innovators and leaders in the asset management industry who will look beyond the performance numbers and ask ‘what are the environmental and social benefits of these investments?’. The leaders will identify and quantify that information.”
Responsible investment no longer sits on the periphery of institutional investment portfolios but it would be a stretch to call it core. Government appears to appreciate the need to get the industry to do more but investors and intermediaries are inconsistent in their approach to responsible investment.
Whether the carrot (regulation) or the stick (performance) drives more institutions to take ESG seriously is unclear but it is without doubt that responsible investment will continue to climb up the asset management agenda.
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