Key points
At a glance:
- Investment managers have improved on ESG approach but still room for improvement
- Manager reporting practices have improved and are transparent on stewardship approach
- Important trustees are part of an ongoing dialogue with managers to ensure they integrate ESG practices
Investment managers are much more transparent on their stewardship approaches, but it remains important for there to be an ongoing dialogue with trustees. Kim Kaveh explores the findings.
Investment managers vary significantly in their responsible investment approaches, with some having much more comprehensive and effective methodologies than others, according to a report published by Lane Clark and Peacock (LCP) this month.
In its fifth biannual responsible investment survey - conducted with 137 pension scheme investment managers between August and September last year - LCP found that there has been an increase in managers adopting ESG approaches across the board, but there is still room for improvement.
ESG integration
Some 61% of managers said they offer a specialist ESG fund, and 85% said they integrate ESG factors with the aim of improving long-term investment outcomes for their clients. Some 67% said they integrate ESG because they believe the associated risks and opportunities can affect risk-adjusted returns over the short to medium term.
Only 8% said ESG integration is not an important part of their investment approach, and half of respondents said they integrate ESG factors with the aim of improving long-term investment outcomes for society.
Furthermore, the number of managers who said responsibility for responsible investment was shared widely among investment professionals increased from 52% to 85% since the 2018 survey.
There was also much greater evidence of board-level accountability for responsible investment, which rose from 34% to 81% over a year. Some 59% of chief executives said they oversee and are held accountable for inclusion of ESG and stewardship in the investment process.
Just over half of managers had a policy on climate change, 40% had a policy on boardroom roles and diversity, and 23% had a policy on fair pay and benefits. Nonetheless, many managers said they have few specialist staff, with half noting that less than 1% of investment professionals are ESG or stewardship specialists.
Half said climate change is a key engagement topic, 44% said they systematically consider it at security level before investment, and 14% said they do not consider climate change. Further, 30% of managers said they do not systematically consider climate change factors for all asset classes.
LCP also found that some managers are not undertaking analysis of portfolios' aggregate exposure to ESG risks. Across the managers who completed the survey, this was true for 23% of asset classes, down from a third from the 2018 survey.
Voting practices were generally strong; on average managers said they exercise 95% of votes and vote against management or abstain at least once at a third of annual general meetings (AGMs). This was a slight fall from the last survey, when this figure rested at 97%.
The reasons for managers not exercising all of their votes included: the manager's holding being a very small proportion of the overall capital of the company; clients not exercising the voting rights that they control; and managers believing they may sell the stock before the date of the shareholder meeting.
Engagement
LCP also scored managers on their approach to engaging companies with climate-change practices, in a series of open-ended questions.
It came to the conclusion that just 52% of managers gave a "reasonably detailed" description of their approach on climate change and 54% gave a "good" example.
Meanwhile for fair pay across the workforce, LCP concluded just 23% of respondents gave a "reasonably detailed" description of their approach and 23% gave a "good" example, which was down from 31% in the 2018 report.
The report said this suggests managers are "not responding adequately to the widespread public and political concern on this topic".
For board diversity, 40% gave a "reasonable description" of their approach up from 31% in 2018, and 42% gave a "good example", up from 39%.
Reporting practices
On average, managers were signed up to six relevant codes and organisations compared to around five last time, with 23% of respondents signed up to 10 or more, compared to 14% last time.
The key code was the United Nations-backed Principles for Responsible Investment, and most managers (88%) said they are signatories. This increased from 78% in LCP's 2018 survey and 66% in the survey before that.
The consultancy argued that the UK Stewardship Code is also important, and that it expects firms that manage UK-listed equities and have "significant UK presence" to commit to this code. Indeed, it confirmed that almost all of the managers in the study who met this criteria had made this commitment.
It is important to note that rules came into force at the start of October requiring pension schemes to reveal how their investment strategies consider financially-material ESG risks, including climate change. This could have had an impact on the improvement in this area.
Meanwhile, the number of signatories in the survey who were classified as ‘tier one' by the Financial Reporting Council (FRC) increased from 83% two years ago to 87%. These are firms which the FRC considers to have provided "a good quality and transparent description of their approach to stewardship and explanations of an alternative approach where necessary". Those ranked in tier two report less transparently, do not provide good explanations for departure from the code, and will need to improve their reporting requirements to gain a higher rating.
LCP principal Claire Jones says: "On the one hand the general improvement over the last two years in every part of survey has been encouraging, but there is still plenty of room for improvement in pretty much every section of the report, and many managers are not scoring top marks.
"The question now is how much momentum there is within the industry and the extent to which managers are on path to achieving standards we would like to see, or whether there needs further intervention."
According to Jones, regulators should wait for further evidence on compliance with the disclosure regulations "to see how things play out" before further intervention from regulators to ensure managers are adopting ESG practices.
Jones notes that one thing which is extremely important is that trustees are part of an ongoing dialogue with managers and make it clear to them that they expect high levels of ESG integration and stewardship.
Jones adds: "They need to make sure managers are prioritising [ESG] appropriately, and if trustees feel this is not the case and managers are not responding to feedback they need to move their money elsewhere."
However, she also points out that for smaller managers there are resourcing issues and so getting to grips with ESG integration could be a challenge, in particular for other asset classes other than equities.
