Demonstrable action will be required by asset managers to meet the needs of increasingly outcome-oriented institutional asset owners as social and governance issues come into sharper focus in the wake of the COVID-19 pandemic, research by JPES Partners finds.
The investment communications consultancy interviewed key decision makers from 20 UK pension schemes, charities, investment consultants and fiduciary managers - collectively responsible for £250bn of assets - to assess how the coronavirus crisis has impacted ESG strategy and the requirements of asset owners.
It assembled the results of its research in a report - A Brave New World? ESG and Asset Owner Expectations in a COVID-19 Paradigm - finding that:
- 95% of institutional decision makers identify workforce health and safety as a ‘very important' issue
- 97% rate environmental considerations as ‘important' or ‘very important', but it is now assumed this is incorporated into asset managers' activities
- 60% of respondents now expect the COVID-19 crisis to stimulate an acceleration of environmentally focused activity
- 89% identify voting practices and engagement with underlying investments as ‘very important', for both active and passive management styles
The report said, while environmental issues remain the highest priority for asset owners, current initiatives are expected of managers and further progress is required - noting it is now social and governance considerations which are increasingly coming to the fore, with the coronavirus crisis causing institutional decision makers to increase their scrutiny of asset managers, both to ensure managers are following best practice principles and to meet institutions' own regulatory requirements.
It said this focus on holding asset managers to account is particularly reflected by institutional decision makers' attitudes towards the UK Stewardship Code, with a majority of respondents indicating they expect managers to sign up and adhere to the voluntary guidelines (due to come into full force in March 2021) or risk being excluded from future tender processes.
The report also identified active governance and engagement with underlying investments as a vital area for institutional decision makers, with asset managers expected to increasingly exercise positive pressure on a range of issues including executive remuneration and board diversity, while also applying such criteria to their own businesses.
Critically, however, respondents indicated an expectation for engagement and stewardship to be applied across all investment styles, increasing requirements of passive managers to demonstrate their credentials in this area.
Additionally, despite historic perceptions that the application of ESG criteria may compromise returns, institutional decision makers said they now expected ESG considerations to not only be integrated into investment practices, but to positively influence performance.
Commenting on the research findings, JPES Partners managing director Julian Samways said: "ESG has been the most dominant theme in the asset management industry over the last decade; if anything, the COVID-19 crisis has accelerated these issues and the resulting expectations of institutional decision makers.
"Critically, however, ESG has traditionally been primarily associated with environmental issues. Whilst these continue to remain the highest priority for asset owners, the expectation that ESG should be integrated into investment practices means that asset managers can no longer differentiate themselves on environmental issues alone, and must be able to demonstrate positive, proactive efforts to meet social and governance best practice."
Samways said it was also important that asset managers recognise these areas of focus do not just apply to their investment products, but also to their own companies.
He said: "COVID-19 has made people think carefully about all aspects of life, including how businesses have conducted themselves and managed their employees throughout the crisis. Asset managers therefore need to be able to provide demonstrable evidence that ESG does not just relate to their investment efforts, but permeates all aspects of their corporate culture and activity."
A copy of the report can be obtained from JPES Partners co-head of investment communications Matt Rogers.
Institutional investor demand for green UK sovereign bonds will be high as pension schemes seek to manage their climate change risks and tap up green opportunities, experts say.
Aegon has embedded ESG criteria across its in-house workplace default funds through a partnership with HSBC Global Asset Management.
The Universities Superannuation Scheme (USS) trustee board has warned investment returns will be lower in the future than expected as it edges closer to concluding its 2020 valuation.
There are many lessons to be learned from the March 2020 market volatility and liquidity squeeze as the Covid-19 pandemic escalated, Barnett Waddingham says.
Retail and hotels have taken the brunt of lockdowns, while logistics and residential have fared much better. Even when Covid-19 is bought under control, the path of recovery is far from straightforward, writes Stephanie Baxter