Asset owners say ESG expectations now play ‘major role’ in manager selection

manager selection

Environmental, social, and governance (ESG) factors are now key criteria for selecting new asset managers, according to a survey of pension schemes, insurance firms, and family offices worth a combined USD7 trillion.

A full 60 per cent of investors now say that sustainability considerations play a ‘major role’ in manager selection, with large institutions and European investors continuing to lead the way. This figure has risen from 41 per cent in 2018.

According to the survey from bfinance, asset owners are also distancing themselves from managers that are not keeping up with the drive toward responsible investment. 

Nearly half expect their asset managers to employ dedicated staff focusing on ESG, and most equity and fixed income investors now say they are ‘unlikely’ to hire a manager who is not a signatory of the social and environmental investor network, the UN Principles for Responsible Investment. 

On top of this, workforce gender and ethnic diversity has become the top priority for hedge fund investors when selecting managers.

Terminating managers over ESG concerns also appears to be on the rise, with almost one third (32 per cent) of endowments and foundations reporting that they have terminated a manager with sustainability as a primary factor. Even among investors who ranked ESG as of ‘minor importance’, 29 per cent of investors said it had contributed to at least one termination.

Major asset managers have started responding to client pressure on sustainability, including the EUR750 billion German asset manager DWS, which last week stated that all of its fund launches will be ESG products from 2021 onwards.

Asset owners have made sustainability a priority as governments push for large investors such as pension schemes to begin mandatory reporting on climate risks, which will hit large pension schemes in the UK from October.

bfinance highlights a shift towards a ‘total portfolio approach’ among asset owners, with 48 per cent of asset owners globally saying that ESG considerations are now of “high importance” to their investment approach. A further 39 per cent say they are of “moderate importance”.

The proportion of asset owners measuring carbon emissions across their portfolios has risen sharply from only 13 per cent three years ago, to 46 per cent in 2020, with a further third now “actively considering” it.

However, European investors still prioritise the subject more than their global counterparts, with 45 per cent of US respondents saying that ESG issues are of “minor” or “no” importance. 

Kathryn Saklatvala, head of Investment Content for bfinance, comments: “The results show the increasing breadth, depth and complexity of ESG implementation as investors look to take a more consistent, portfolio-wide, data-grounded and in many cases impact-minded approach. Yet the advancement also brings challenges: investors with increasingly clear objectives and priorities in this space are even more frustrated by the lack of clear, consistent, standardised data on many of the key issues.” 

The overwhelming majority of investors, 84 per cent, say that obtaining consistent ESG reporting across asset managers and asset classes is challenging, with 55 per cent calling this a “major challenge”. As different regulations continue to emerge around ESG matters, regional fragmentation is increasing along lines of methodology and data transparency. 

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Madeleine Taylor
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