What role do asset managers play in sustainability? Part 3: Lead asset managers in ESG integration

The global Socially Responsible Investments (SRI) market is worth around 20 trillion EUR (25% of the total worldwide asset under management), half of which is managed in Europe.  Over the past decade, this market grew for over than 200% becoming today one of the main growth target for asset managers.

Who are the major ESG players and market leaders in Europe?

A survey performed by ShareAction organization in Europe in 2017, shows that French and British asset managers are the leaders in terms of sustainable investments and practices. The survey was performed on 40 asset managers from 10 European countries and aimed at examining transparency and responsible investment practices such as integration of ESG in investments strategies, management of conflict of interests, public disclosures, engagements, voting reporting etc.

The analysis performed shows that all asset managers have already integrated responsible investments in their strategies, but the practices vary from one country to another and from one asset manager to another. 5 topics were closely analyzed:

Responsible Investments policies

39 out of the 40 asset managers interrogated have a publicly disclosed policy. All of these policies include how ESG is integrated in investment strategies and how companies engage companies in which they are invested. Nordea AM and AXA IM are best-in-class in terms of disclosures as their documents are clear and provide detailed information on ESG.

Client communication and engagement

The survey shows that asset managers communicate with their clients on ESG in various ways. Most common practices remain a dedicated reporting sent annually to clients or ESG dedicated meetings.

Illustration 6 – How Asset Managers communicate about ESG (Source: ShareAction)

Shareholder voting and company engagement

Disclosure of voting behavior is a requirement in many European countries such as Belgium, France, UK, Spain, Italy, Germany and Denmark. Asset managers mostly invest on behalf of pension funds who ow to their own clients an explanation on votes and the way their best interests have been taken into account. That being said, 70% of interrogated asset managers disclose how they have voted but only 20% disclose the rationale behind their decisions. Best in class in terms of voting disclosures are Aviva asset manager and Schroder Investment Managers.

Regarding engagement, best practices consist in disclosing the number of engagements by topic, how the asset manager has engaged with companies and what the results of the initiatives were. The survey showed that asset managers still need to improve their disclosures on their engagements.

Impact measurement and management

The survey analyzed if asset managers have a clear impact evaluation process and disclosures. 82.5% of them have a basic mention of impact investing and 62.5% provide information on the methodology used. Only 5% of asset managers surveyed provide detailed information on how impact is measured and on how ESG risks are monitored and integrated in portfolios’ risks. Also, only 64.5% of respondents evaluate impact of responsible investing on portfolio performance and risk.

The best-in-class on this topic are Ostrum and Robeco Group who both have dedicated pages on their website describing the environmental and social impact of their investments.

Conflicts of interests

One of the most crucial and important topics of investment managers is the mitigation of conflict of interests specifically when it comes to voting practices. 85% of the asset managers surveyed have a conflict of interest policy available on their website but only 70% of them provide detailed explanation on how these conflicts are managed and solved.

Fees and charges

Fees and charges are part of the Key Investor Information Documents (KIIDs) and should be easily accessible to investors and understandable. Only 82.5% of the surveyed asset managers responded positively to this question. The rest only attempt to provide comprehensive information.

Internal governance on responsible investment

 In order to get full credibility in their engagements, asset managers should promote responsible investments internally. Strong internal governance and CEO sponsorship is thus a must. Only 67.7% of respondents say that board’s members have oversight of responsible investments and 64.5% say that ESG is integrated across departments. All asset managers say that portfolio managers are the ones responsible of the ESG performance of their funds.

Illustration 7 – How Asset Managers oversight ESG criteria (Source: ShareAction)

Conclusion

Financial institutions play a major role in promoting and influencing sustainability through their engagements, actions, communications and investments. As of today, Responsible Investing was not a requirement and financial institutions, specifically asset managers, did not have many constraints regarding ESG integration. The only obligation consists of disclosures.

The survey performed by ShareAction covered essential topics such as management of conflict of interest, disclosure of policies and client reporting. These topics have become requirements in the Shareholder Right Directive and are the core of the Sustainable Finance initiatives led by the European Commission. As showed in the survey, asset managers still have a lot of work to do in order to comply with these points and make responsible investments and ESG integration a priority in their developments and transformation strategies.

How can we help?

We are a consulting firm specialized in financial services. Throughout our existence we have built a very solid knowledge in CIB, asset management, capital markets etc. Our teams of experienced consultants have successfully led many types of assignments making them highly adaptable to any new environment and subject.

We have already performed successful assignments on the Shareholder Rights Directive for international asset managers and have gained significant experience in ESG integration. We can thus help you comply with new regulations and assist you in your ESG transformation projects.