Fund managers start to heed investors' ESG calls

This has hit home with fund managers, with half of those surveyed in the Financial News 2016 Asset Management CEO Survey saying they had opted to listen to their clients and take environmental, social and governance issues into account when building portfolios.

As pension funds and other large investors have been challenging companies in which they are shareholders, screening out securities not in line with their beliefs and decarbonising their portfolios, many asset managers have been reluctant to join them.

Apart from some notable exceptions, many managers claimed there was no evidence that taking an ESG approach would not harm their performance; others said that it was not core to their investment beliefs. Others thought it was a fad that would sit on the outer limits of the investment universe and they would not have to get involved.

So detached from the mainstream asset management world was ESG, that until 2016, the FN CEO Survey had not featured a question on the issue. There is, therefore, no historical data against which to compare attitudes.

However, in 2016, exactly half of all surveyed CEOs said their firm incorporated ESG issues into fundamental investment processes as a default across all funds and products. A further quarter said they already offered an ESG product range, were creating one, or were looking to implement such a strategy across the board.

For the 18.7% answering “other” to the question, more than half said they had some sort of ESG process in place, with several of the rest claiming their specialism meant it was not valid for them.

Just 6.2% of 48 CEOs said their company did not have such processes, nor would they be getting them. These three business leaders represented firms in the smallest, mid-sized and largest fund manager brackets.

Fiona Frick, chief executive of Geneva-based Unigestion, said: “There is a growing trend. Our clients, as shareholders, want to engage and vote. They feel a social responsibility, not just a fiduciary one.”

Investor power

It is the voice of these clients – and their billions of dollars, pounds and euros – that has heaved many asset managers over the line. Some 52% of CEOs said client demand had been the major influencing factor on their ESG policy.

In a survey from custodian and asset manager Northern Trust, nearly 50% of a group of Scandinavian investors said ESG would be of significant importance to their investment decisions. A further 26% of them said that ESG credentials could “make or break” a deal.

While some fund managers have been pioneers in the field, others have dithered, but their clients have already turned a corner – and expect their managers to do the same.

Euan Munro, CEO of Aviva Investors, which has been a pioneer of ESG, said: “For investors it has become a bigger issue. If companies are taking risks with corporate governance – such as not paying the living wage – it can backfire, with consumer backlash.”

Aviva, along with other leaders in the field, has an embedded ESG team that has been in place since before the financial crisis. The firm was a founding signatory of the United Nations Principles for Responsible Investment. Munro thinks some of Aviva’s competitors are playing catch-up, but that it will be necessary as clients demand it.

Munro said: “For us, it’s not a religion, but a business mindset.”

Integrated processes

Mark Zinkula, CEO of Legal & General Investment Management, said the company’s 10-strong corporate governance team did not report into any investment team but instead had a direct reporting line into him.

He said: “The team provides specialist ESG considerations which are then integrated into the investment process.

“This is complemented by our active engagement at a company, sector and policy level, which is at the heart of what we do at LGIM.”

These moves will cheer investors of all stripes and sizes. While some are further down the ESG route than others, it is unlikely to be a path any will backstep on, especially when a new generation of savers and investors is looking to engage with finance.

The asset management business is evolving all the time, too, as savers, enabled by technology, and investing in defined contribution pensions, get closer to the action than previous generations.

Michael Karpik, CEO at State Street Global Advisors, said: “How will the next generation approach ESG? How do ESG factors enhance performance and reduce risk?

“We can design strategies that take these factors into account, back-test them and simulate returns to show how they can support an investment portfolio.”

Those fund managers still reluctant to join the ESG party may find themselves in an increasingly inhospitable climate – which they will have created for themselves.

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