Despite improvements in investment manager attitudes towards responsible investment, research reveals there is a way to go before the majority deliver meaningful action. Victoria Ticha explores why
With environmental, social and governance (ESG) considerations and stewardship rising to the top of industry concerns in recent years, an important question has surfaced: are investment managers doing all they can in this area? While responsible investment (RI) has hit the mainstream, and there is greater engagement on ESG issues than ever before, research shows more progress is needed when it comes to investment managers delivering on their claims.
Lane Clark & Peacock's (LCP) biennial investment survey of 120 major UK-based investment management firms finds a disappointingly small number have put in place comprehensive approaches to responsible investment, particularly when it comes to managing climate-related risks.
The consultancy sought to pinpoint some of the underlying indicators that illustrate whether managers are truly integrating ESG factors or whether they are simply paying lip service to them.
It quizzed managers on ten different topics, collected detailed information and then allocated each respondent a score between one and four, one being the poorest.
PRI not enough
According to LCP senior consultant Claire Jones, it is too easy for a manager to sign up to a code such as the United Nations-backed Principles for Responsible Investment (PRI), the key code of conduct in this area, or make claims about their stance on RI.
While the survey found some increased consideration of ESG issues and improvement in attitudes compared to the survey two years ago, only 8% of the 120 investment managers received the top score compared to 20% awarded the lowest.
Also, when asked questions such as "what proportion of staff have responsible investment mentioned in their job description", a very different picture is revealed; less than 1% of investment professionals were found to be RI specialists. Such results suggest there is still a huge range between best and worst practice and varying attitudes towards RI, although LCP expects this will improve over the next few years.
Some 78% of respondents said they were PRI signatories - a substantial improvement on the 66% recorded in the 2015 survey. However, only 34% said that someone oversees and is held accountable for ESG and stewardship issues at the board level. Managers were also explicitly asked whether they considered ESG issues in their investment process across equities, government bonds, non-government bonds and loans, property and infrastructure, multi-asset strategies, and 'other'. More than a third said they did not for at least one relevant asset class.
Half of respondents seemed to have assigned widespread responsibility for RI, with 30% acknowledging that three-quarters of their investment professionals had undertaken at least two hours of training on ESG and stewardship in the last two years.
The research shows being a PRI signatory is necessary, but not sufficient, for managers to demonstrate good responsible investment practices across their services, Jones notes.
When LCP asked managers about their approach to climate-related risks, a lot of people were not familiar with the Task Force on Climate-related Financial Disclosures recommendations, for example.
Some managers gave relatively brief responses, which tended to be from managers who appeared to put low weight on RI, and therefore didn't want to spend a lot of time answering the questions, she says.
Asset managers need to step up, says LCP partner and head of investment research Matt Gibson: "There are assumptions that RI is going on behind the scenes, but we want to bring greater transparency to ESG and stewardship issues. For some, lip service now needs to translate into meaningful action. Publicly stated commitment is a good first step, and helps to hold people accountable, but action is needed to match the rhetoric."
While the names of the surveyed firms and their scores are not being revealed, PP reached out to four large asset managers, which are all signatories to the PRI, for their reactions.
Fidelity International's head of stewardship and sustainable investment Mike Gibb says: "Today, investor focus is no longer solely on the return of assets but increasingly on how much good investments can bring to society. As a result, there has definitely been a shift in recent years, with the investment management industry taking a more active approach to ESG."
However, Hermes Investment Management head of responsibility Leon Kamhi argues there is still a long way to go. "There remains a lot of box ticking but that's changing with the increased pressure from asset owners, consultants and society at large for investors to act and own their investments responsibly."
For Schroders head of sustainable research Andrew Howard, as focus moves from rhetoric to action it is not all that surprising to see differences emerging. "The question today might be 'how much are different firms doing?' But the real question should be 'how well are they doing it?' That question means fundamentally thinking about ESG issues as investment questions and making a real commitment to understanding what the implications are for the decisions we make."
Insight Investment supports greater transparency in disclosures, meaningful action by managers and full integration of ESG factors into investment processes because clients expect it to be an active asset owner. ESG analyst Joshua Kendall says there has been a marked increase in client demand:
"This is encouraging us to keep pioneering in this area and we hope in turn it encourages the wider investment management industry to demonstrate they follow a responsible approach. Regulatory change is also encouraging a shift towards demonstrable progress."
For managers lagging behind, what do they need to do to improve?
Jones expects managers to give much better answers on the work to implement the recommendations of the climate task force. Pension funds themselves are being probed by MPs on their approach to climate change risk.
"We'd certainly like to see the proportion of PRI signatories being much closer to 100% in future, but there will be some managers whose investment style doesn't fit with ESG integration so couldn't sign up," she adds. "While in theory it is possible to get close to 100% within two years, I very much doubt it will happen."
The PRI plans to start removing managers from its signatory list if they do not meet minimum standards, and the Financial Reporting Council will be reviewing the UK Stewardship Code.
Other developments to watch out for include changes to the Investment Regulations, covering trustees' Statements of Investment Principles (SIP) that facilitate RI. This would impact trustees' engagement with RI, "because as soon as there is a legislative requirement it forces trustees to consider the issue", says Jones.
"Even if the Department for Work and Pensions only makes relatively straightforward changes to the SIP requirements, it means every trustee board should at least consider RI in the next three-year SIP review cycle.
"That has the potential to be powerful, particularly when combined with some of the wider developments in the market such as The Pensions Regulator's increasing expectations in this area."
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