Asset managers are increasingly feeling the pressure from institutional investors including pension funds to address ESG issues and provide greater transparency on their efforts to tackle the risks, Russell Investments finds.
The asset manager's 2020 annual ESG survey, published today (6 October), found the focus had been particularly amplified on climate risk, although governance issues continued to dominate, and that both engagement activities and internally-produced quantitative data were growing.
In the survey of 400 managers, an increasing number said ESG factors could dominate investment decisions, particularly where security returns or risk were affected. The remaining 36% said ESG factors never dominated investment decisions, a drop from 45% last year.
The majority of managers were increasing their access to proprietary data sources, with information gathered by 77% from direct engagement with companies, up from 72%, and 71% from company reports or regulatory filings, up from 66%.
Across equities, fixed income, and private markets, the number of managers reporting that they primarily relied on internally-produced quantitative data but still used some external data had increased, while those relying solely on external data fell.
Russell Investments director of fixed income research Yoshie Phillips said managers were "continuously trying to build a stronger framework to capture ESG-related info".
Fixed income managers were increasingly focusing on ESG issues and leveraging their investments, Phillips noted. The survey found that 38% reported their regular meetings with management always included ESG discussions, up from 24% last year. Meanwhile the number that never engaged with companies at all halved to 6%.
Phillips said: "Engagement activities have evolved across asset classes. It has been a hot topic for fixed income managers. The fixed income market accounts for $70trn market cap and most bond issuers do have to come back to the capital market, which means they have to keep a good face with the community.
"There is growing evidence that engagement can provide nudges, even by bondholders. If engagement doesn't result in desirable outcomes, that information itself is useful to asset managers when assessing activities but it is also important feedback for bondholders."
Data coverage for all fixed income segments was improving, the survey found, with both investment-grade and high-yield corporate bonds coming out top for data availability. However, both developed and emerging market sovereign bond data was below 50% coverage, a figure that Phillips blamed on a lack of consistent reporting.
Across equity managers, 57% said they voted against management proposals on at least one occasion, up ten percentage points on last year's survey. Meanwhile, 61% of those based in the UK reported voting against between 0 and 10% of management proposals in 2019, while 8% said they voted against between 50% and 100%.
In the UK at least, the increased focus was largely put down to recent regulatory developments, including new requirements on trustees to provide implementation statements to set out how they have responded to financially material ESG risk.
Director of strategic client solutions and EMEA head of responsible investing Jihan Diolosa commented: "There are increasing numbers of questions around who we are engaging with, what are the managers' stories, and these are coming through from our existing clients and prospective clients. They are wanting more transparency in this space."
The governance element of ESG investing racked up the most focus, with 82% of managers surveyed noting this was their primary concern, although the proportion selecting the environment has risen from 5% to 13% over the last two years.
Russell Investments said the uptick in the latter was largely due to the rise in local regulations, a pattern visible when looking at those who chose environmental considerations as the most important. The number within the UK selecting this in 2020 was 11%, compared to 7% in 2018; for continental Europe the difference was more staggering, rising to 24% from 4%.
Phillips noted that the significance of governance might appear surprising when much of the ESG debate seems focused on climate risk - but she added that governance issues were more pervasive.
"Environment might be important for energy and electricity, but less important for banking. Corporate governance applies to companies regardless of industries. It is crucial to the company's long-term enterprise value."
Diolosa added: "Even though E, S and G are quite distinct, they are so closely interlinked. Just because G is dominating, it doesn't imply E and S are less important."
With under three-quarters of a year left for retendering exercises to be completed, capacity issues could arise and reduce choice, writes James Phillips.
In this live blog, Professional Pensions' sister title Investment Week collates all the breaking market news, analysis and opinion on equity, bond and currency movements as well as the impact of trade wars, tightening monetary policy and the Brexit negotiations....
Pension funds will be required to report the risks that climate change could have on investments under new rules and investors are demanding accountability from companies.
Trustees need to develop their understanding and capacity around ESG issues to be able to make better decisions for their members, The Pensions Regulator (TPR) says.