Institutional investor uptake and acceptance of Environmental, Social and Governance investment principles continues to increase. But research finds players in the asset management industry need to make additional strides to prove themselves in the eyes of clients in this regard. This is primarily because investors remain heavily reliant on internal staff to manage these investments and show little faith in reported data.
ESG investment and sustainability is no longer relegated to a niche portion in institutional investor portfolios as greater integration can be witnessed on a global scale. However, although the investor buy-in has increased, challenges remain.
Local authority pension funds in the UK recently highlighted their disappointment in the asset management industry when it comes to sustainability. A survey published by the Local Authority Pension Fund Forum (LAPFF) in 2018 said only one in five feel their ESG needs are being met “very well” by managers. Furthermore, the majority (63%) said asset managers were just “somewhat effective” at engaging with portfolio holdings to achieve concrete and measurable change in ESG behaviours.
Recent research CoreData Research has conducted on behalf of its clients also indicates the asset management industry can improve the support it provides investors on ESG and sustainability matters. One study we carried out in late 2018 found institutional investors globally are more likely to manage ESG in-house.
In fact, over half rely on their internal staff to take care of this part of their portfolio. Only a third depend on asset managers for the management of ESG investments. This suggests there is a chasm between investors and asset managers when it comes to ESG. This gap should be narrowed for the benefit of all parties involved, considering this way of investing is only due to become more influential in the asset management world.
Findings in another bespoke study reveal a concern among institutional investors about companies greenwashing their results to appear more ESG-friendly than they actually are. Globally, around 40% of investors consider this to be a challenge when investing in ESG. The LAPFF study also puts forward this concern – almost half (45%) stated that while “asset managers assert that ESG is integral to investment processes and valuation methodologies, they provide little evidence that this was the case.”
All of which provides an opportunity for the asset management industry to prove itself in the realm of ESG and put its money where its proverbial mouth is.
Another issue institutional investors raise in relation to ESG is around data and its reliability. Therefore, firms in the industry need to make additional efforts to prove they are walking the walk and not just talking the talk. This proof can come through in their investment selection and philosophy, their level of activism as well as their overall corporate social responsibility efforts as a firm overall.
From the perspective of investors, the integration of ESG investing has come on in leaps and bounds. From simply being a tick box exercise, mandated by policy, the majority of investors now say they incorporate ESG values to align their investment decisions to their organisation’s values. The main benefit of doing so remains a reputational one, but the simple recognition that this is necessary represents considerable progress on their behalf.