ESG no longer an optional ‘add-on’ for asset managers, finds Russell Investments study

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Investment firms are incorporating more ESG metrics into their investment processes, and expanding the amount of resources dedicated to responsible investment, according to a major new survey of asset managers conducted by Russell Investments.

Russell Investments’ sixth annual ESG Manager Survey analyses the practices and views of 400 asset managers globally across a broad range of asset classes (including equity, fixed income, real assets and private markets) to assess attitudes toward responsible investing and how firms are integrating ESG factors into their investment processes.

The survey, conducted by the firm’s manager-research team, finds that asset managers are increasing the extent to which they incorporate ESG-specific considerations into their investment activities. 78 per cent of managers surveyed globally now explicitly incorporate qualitative or quantitative ESG factor assessments into their investment processes (an increase of 5 per cent compared to last year).

Almost all regions surveyed as part of the Russell Investments study showed progress in the extent to which ESG considerations are regularly embedded into investment processes. The US (+11 per cent), Canada (+15 per cent) and the UK (+11 per cent) show the most growth since last year’s survey.

“The results of our 2020 survey show the fund management industry continues to embrace ESG integration, even amid pandemic-related challenges and volatility,” says Yoshie Phillips, director of Investment Research, Global Fixed Income. 

“They are seeking better ESG information, deeper resources, broader consideration within investment processes and clearer regulatory standards. While governance remains the dominant factor in investment decisions, relative to environmental and social factors, the survey also reveals increasing focus on all three areas. At the same time, asset managers indicate they are seeking greater clarity of the value-add from explicit ESG integration.”

Governance remains the critical consideration for asset managers, with 82 per cent of respondents identifying this as the ESG factor with the most impact on their investment decisions, reflecting the importance of company management in delivering long-term enterprise value. 

However, environmental and social issues are becoming more pronounced in asset managers’ thinking, with this year’s survey showing a 4 per cent increase in the number of managers identifying environmental considerations as the factor that most impacts their investment decisions.

Overall, engagement was cited as the most frequent source of ESG-related information. Notably, proactive engagement has become a particularly key feature among fixed income managers, with 92 per cent now stating that they regularly engage with the underlying companies they invest in. An increasing number of fixed income managers, for example, report using bondholder engagement as a way to gain greater insights into the underlying companies or entities, improve transparency and influence business practices.

The Russell Investments study also identifies that an increasing number of asset managers are now using external ESG data providers to supplement their in-house views, reflecting growing recognition among the asset management community of the importance of ESG integration when analysing investment opportunities.

Jihan Diolosa, head of Responsible Investing EMEA, adds: “ESG is no longer an optional ‘add-on’; it is now an essential consideration that asset managers have to incorporate into their decision-making processes. Our research shows that the investment industry is moving in the right direction, with increased support for sustainability-related initiatives and improvements around reporting practices marking important steps in the journey. Clear challenges to progress remain, particularly in certain regions. However, the broad direction of travel is clear and the asset managers who do not adapt to the changing landscape will be left behind.”