May 22, 2024
Investment

Investment managers are still over-promising and under-delivering on ESG


Groundhog Day isn’t until February. But the Redington team could be forgiven for feeling trapped in a time loop of “six more weeks of Winter” on ESG delivery.

As we studied the results of our annual Sustainable Investment Survey over the last few months, published in mid-December, it became clear too many investment managers seem stuck in a cycle of over-promising and under-delivering.

The data from the latest survey is representative of the whole market with 127 managers participating, and aggregate of £39trn assets under management covered.

It’s the sixth year we’ve collected this data, the fourth we’ve reported on it fully, and not enough has changed over that time.

See also: – Green Dream with Redington’s Lee: Clients are challenging managers to do better

Diversity

An overwhelming 97% of managers either agree or strongly agree diverse teams improve their ability to deliver a more effective investment strategy. No one disagrees with that statement.

Yet only half (49%) of managers have set themselves targets to improve gender diversity, only a third (32%) to improve racial diversity, and the numbers are still less for targets on other characteristics.

Firms are still hiring twice as many men as women into their investment teams. That’s slightly higher than the 23% average women in teams currently, but it won’t move the dial quickly towards fairness. Some 6% of investment teams include no women at all.

Some managers appear to be deluding themselves too. One in four (26%) of teams strongly agree that their investment team reflect the diversity characteristics of their country and region. But fully half of these respondents have a makeup of less than 30% women.

These datapoints emphasise gender diversity in part because enough managers report on it to allow us to make sense of the data. The fact many managers aren’t capturing and reporting on other aspects of diversity means that they can’t effectively address those aspects at all.

Stewardship

There’s a significant gap between the number of managers and strategies that say a particular ESG issue is a ‘priority’ and those that can actually demonstrate delivery of an engagement on that priority.

At the firm level, this gap is around 20-30%. For example, 92% of firms say climate is a priority (what are the other 8% thinking?) but only 64% can show evidence of engagement. The gap is even worse at the strategy level where it sits between 40-50%.

Again on climate, 95% of strategies say they prioritise climate, yet only 43% can provide evidence of doing anything about it.

See also: – Hiring slows for engagement roles at asset managers

Maybe this reflects a lack of systems to capture and report of stewardship activity, but that’s hardly comforting given stewardship requires ongoing oversight and assessment of progress. Systems are critical to this and there are now a number of off-the-shelf ones available.

When we analyse case studies of engagement that managers publish in their stewardship code reports, there is a significant lack of material outcomes. Nearly three-quarters (73%) of case studies are now on substantive issues. A similar proportion show proactivity by the manager, but only 28% of them discuss outcomes in such a way that it gives us comfort there is real materiality to the manager’s activity.

That’s particularly disappointing when we reflect these case studies are the sample, among their wider activity, that the managers are choosing to highlight. We have to assume this is the best of their stewardship work.

See also: – Asset managers’ climate engagement is ‘cosmetic at best’

Looking at the positives, we have seen improvement in some areas. While the level of recruitment of specialist ESG and stewardship talent has declined precipitously this year, that follows a boom for the two prior years. On a longer perspective that story is still a positive one.

The level of manager interest in impact strategies is also remarkable. More than 40% of managers already run such a fund, with £859bn put to work on impact solutions.

Real-world consequences

But our assessments of managers suggest there is much more that should be done. It’s worth saying these assessments do have consequences.

In our manager research processes for our preferred lists (those managers we recommend to clients for particular investment strategies) we insist on seeing, and hearing from, at least one investment team member from an under-represented group.

We find this tells us a great deal about the culture of the organisation and the decision-making of the team, which are important factors for future delivery of investment performance.

Further, clients are paying increasing attention to investment team diversity. We suspect there will be cases where managers that lack diversity will find themselves excluded from processes or changed.

See also: – ShareAction: Asset managers’ use of escalation in engagement is ‘ineffective’

Similarly, we have excluded some managers from our preferred lists because of their poor stewardship record.

Two Redington clients changed managers over the last year at least in part because of our assessments of the stewardship capabilities and approach of their existing providers. Other managers are on notice, and we expect more such changes in the coming years.

These are just examples of a growing trend. Investment managers that do not effectively integrate material sustainability risks, including climate change, into their processes, are unlikely to convince clients they will perform well in the future world.

It’s not enough for us all to say the same things year over year. Managers that do not change risk being left behind, like a groundhog in the snows of Pennsylvania.



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