ESG INTEGRATION & STEWARDSHIP
Investing, engaging, excluding
Portfolio manager(s)
Research analyst
A combination of portfolio managers & research analysts
A combination of the investment team and ESG specialists
ESG specialists
Not sure
ESG has undeniably permeated the asset management industry, with 98% of managers surveyed now reporting a firmwide ESG policy. However, these are not always truly firmwide, with almost one in five (17%) of managers stating that their ESG policy does not apply to all strategies.
Managers surveyed generally assign a high degree of importance to both ESG integration and engagement. At an asset class level, excluding LDI, over 80% of strategies consider both ESG integration and engagement as highly or somewhat important. Managers generally give slightly more weight to ESG integration than engagement. Notably, private debt, private equity and real assets managers appear to be the most progressive from this perspective, with 100% of those surveyed considering ESG integration as highly or somewhat important. LDI, on the other hand, significantly lags in both areas – unsurprising given that LDI portfolios are predominantly government bonds, meaning ESG will not always be a major focus.
ESG integration is seen as important to almost all (99%) active fundamental strategies, while it is said to be unimportant or irrelevant to 54% of passive management strategies."
Broken out by investment style, the research highlights material differences in approaches to ESG integration and engagement. ESG integration is seen as important to almost all (99%) active fundamental strategies, while it is said to be unimportant or irrelevant to 54% of passive management strategies.
Conversely, a greater proportion of passive management strategies consider engagement as highly important when compared with active fundamental and active quantitative strategies. Just 13% of active quantitative strategies consider engagement as highly important, and 42% consider engagement as wholly irrelevant.
Just 13% of active quantitative strategies consider engagement as highly important, and 42% consider engagement as wholly irrelevant."
As the integration of ESG grows, so does the resource required to support it. Overall, 80% of managers surveyed now report a dedicated ESG & sustainable headcount. There is no obvious feature linking those that do not, as the 20% with no resource comprise firms across geographies and of all sizes, ranging from 1-9 employees right up to 250+.
The fact that 45% of managers surveyed report zero headcount dedicated to stewardship & engagement is disappointing."
Stewardship & engagement is less resourced than ESG & sustainable investment, as some managers appear to regard it as a subset of their sustainable investment teams. However, the fact that 45% of managers surveyed report zero headcount dedicated to stewardship & engagement is disappointing. Again, one might expect this statistic to be skewed by a significant weight to very small firms, but it is not. Over two thirds of the 45% have 50+ employees, while one third have 250+.
Of those managers with sustainable investment teams, the average team size is 20, ranging from one person all the way up to 251. Of those with stewardship & engagement teams, the average team size is 13, ranging from one person to 70. Digging deeper into hiring trends, just 34% of the surveyed managers added to their stewardship & engagement teams over the last 12 months, compared to a figure of almost 80% for the 12 months prior.
While wider market conditions will impact this number, this is a significant hiring slow down, perhaps indicating that stewardship & engagement is an area that managers are willing to cut as they face more challenging times financially.
One measure of effective ESG integration may be the alignment of remuneration policies with sustainability metrics. Well-structured incentives can cut the emphasis on short-term performance targets, which may run counter to long-term sustainability objectives. 40% of surveyed managers have not yet taken this approach. Notably, US managers account for 58% of those not incorporating sustainability risks into remuneration, and less than one third of those that are.
Encouragingly, asset managers are demonstrating top-down support for sustainability by providing regular ESG training and/or updates. 88% of surveyed managers do so at least annually.
Well-structured incentives can cut the emphasis on short-term performance targets, which may run counter to long-term sustainability objectives. 40% of surveyed managers have not yet taken this approach."
The picture painted of how asset managers are actually incorporating ESG into their investment strategies is largely similar to last year, with most managers using a combination of integration routes. The use of ESG policies is the most common method (97%), with bottom-up ESG analysis a close second (93%), reflecting the inclusion of sustainability metrics or narratives into fundamental research processes. However, only 63% of asset managers state that they have an exit strategy. Being generous, this could indicate manager confidence in the ability to select sustainable investments at the outset, but it certainly raises questions about whether negative ESG performance will in practice drive investment decisions.
With over half (59%) of the surveyed managers having refined their ESG integration approach over the last 12 months, how ESG is incorporated is likely to remain up for active consideration.
Reviewing who within a firm is accountable for the integration of ESG is a useful factor that can indicate the importance an asset manager places on sustainable investment. Generally, the more senior the responsible individual, the more assured we can be that ESG integration is genuinely implemented. Leading the asset classes on this front are real assets and public equity, where our research finds that responsibility sits with the portfolio manager 51% and 41% of the time respectively, while for private equity this figure is significantly lagging (20%).
Responsibility within private equity tends to sit with research analysts (40%). Research analysts hold responsibility more often than ESG specialists across most asset classes, indicating that the fundamental research analyst role generally now encompasses sustainable investment.
About one-third of asset managers responded with ‘Other’, which tended to refer to the shared responsibility of ESG integration across the three main groups (portfolio managers, ESG specialists and research analysts). Our concern here is that a lack of clear ownership might lead to ESG being neglected.
Reviewing who within a firm is accountable for the integration of ESG is a useful factor that can indicate the importance an asset manager places on sustainable investment."
The sustainable investment conversation has shifted towards real world impact, rather than portfolio sustainability. Exclusions, a popular approach to ESG integration, risk screening out a significant proportion of the investment universe where investor influence and engagement could support change. Nevertheless, baseline exclusions remain prevalent, with 61% of asset managers surveyed stating that they have a firm-wide exclusion policy. Strategy-level exclusions are, of course, more common than firm-wide exclusions with 75% of strategies having a baseline exclusion policy.
At an asset class level, private markets tend to apply slightly more extensive exclusions than public markets.
As illustrated in the table, the most common factors for exclusion are controversial weapons, coal, UNGC violations and tobacco. Of these four categories, coal experienced the largest increase from last year (jumping from 36% to 67%), overtaking both tobacco and UNGC violations, possibly reflecting investor priorities zeroing-in on climate.
Additionally, we see exclusions as more common in active fundamental strategies (81%) than in passive management strategies, where less than half (42%) of the surveyed strategies apply any baseline exclusions. This corroborates the finding discussed earlier that passive management strategies generally place a high degree of importance on engagement.
The most common factors for exclusion are controversial weapons, coal, UNGC violations and tobacco. Of these four categories, coal experienced the largest increase from last year."
What ESG integration really boils down to, and what everyone wants to know, is whether actions are taken and investment outcomes are impacted as a result of incorporating sustainability into decision-making. This is perhaps the most critical area within ESG integration where we would like to see material improvement, as the empirical evidence is mixed.
Managers in private markets reported a significant proportion of recommendations being influenced by ESG factors, but the statistics for both public equity and public credit are somewhat disappointing, with only 57% of analyst recommendations being impacted by ESG issues within these asset classes.
Many asset managers in our research study struggled to provide even a single example of a buy or sell decision in the whole of last year that was driven by an ESG view.
Just 64% were able to provide an example of a positive view leading to a buy, while even fewer (58%) were able to provide an example of a negative view leading to a sell. 30% weren’t able to provide any examples at all. This is consistent with previous years, and continues to be disappointing.
We further investigated the outcomes of negative ESG views by asking asset managers about the conflicts that can manifest between financial and ESG analysis. The margins here are slim, but multi-asset and public credit managers appear the most willing to invest despite poor ESG characteristics, while real assets managers appear the strictest. Interestingly, private equity is the only asset class where an outright ‘Yes’ does not feature in the answers, perhaps indicating more nuance and a case-by-case approach.
Many asset managers in our research study struggled to provide even a single example of a buy or sell decision in the whole of last year that was driven by an ESG view."
We don’t live in a ‘trust me’ world anymore. Across many aspects of life, delivery isn’t taken for granted but must be proved on an ongoing basis. Without evidence, assertions are often disbelieved.
According to our research, some investment managers still seem to believe that their clients will take assertions about stewardship on trust. We’re not so sure.
Who delivers stewardship?On more than half of strategies where this information is provided in our study, we can see that stewardship is led by the investment team, either the portfolio manager(s) (30%), the research analysts (20%) or some combination of the two (11%). At just under a quarter (24%) of firms, the role is covered by more specialist ESG or stewardship professionals, with only 16% leaning on a combination between the investment team and the ESG & stewardship function.
Both approaches have advantages and disadvantages which need to be managed. Responsibility sitting with the investment team should enable a closer integration of stewardship with the investment approach and decision-making, but risks stewardship becoming neglected as other issues may gain priority – most investment professionals see themselves as investors first, and stewards second at best.
Leaving it in the hands of ESG or stewardship specialists should mean greater focus and skill can be brought to bear – and from what we can see, managers deploying this approach generally appear to have well-resourced specialist teams – although a gap may arise between stewardship and investment activities.
Coverage of stewardship approachThe vast majority of managers have a stewardship policy that applies across all assets, regardless of asset class. The lowest reported coverages are 1% and 11% of AUM – the latter appears to be that diverse manager’s equities and multi-asset holdings only. Just 5% of managers that disclose AUM coverage of their stewardship policy report it as less than 50%, and just 8% at less than 80%.
Use of stewardship leversIn order to be fully effective, managers need to be open to the use of every available lever for stewardship influence. Some 94% of managers in the research study report engagement with companies, with almost all of the exceptions being explained by the narrow asset classes those firms invest in. In contrast, only 46% engage with counterparties and 55% with governments, but this gap may largely be down to the fact that these levers aren’t relevant to all asset classes.
Some 94% of managers in the research study report engagement with companies, with almost all of the exceptions being explained by the narrow asset classes those firms invest in."
Given the systemic nature of many sustainable investment issues, we particularly welcome the high proportions of managers reporting that they seek to influence regulators and industry bodies – 71% and 84% respectively.
However, despite asking managers to provide an example of the regulatory work undertaken, only half of those reporting use of this key tool for delivering stewardship did so. With several of those examples only referencing engagement related to ESG disclosures by investment funds themselves, the data suggests that only 29% of managers can actually demonstrate delivery in this area that goes beyond protecting their own business interests.
Engagement activity: workloadSome stewardship professionals appear to be busier than others. One manager in our survey reports no fewer than 13,000 individual stewardship actions – nearly 500 actions per member of its stewardship function. Seven managers report even higher possible workloads, some into the 1000s of actions per individual. For all of these managers, however, we must assume that the broader investment teams shoulder much of the burden. Where the stewardship team is responsible for all activity being delivered, the highest workloads for each member sat at around 80 actions each.
Interestingly, there are a number of managers that appear to expect their stewardship functions to cover large numbers of companies. 15% of firms expect individuals to be effective stewards for more than 500 individual companies. Even where stewardship functions are two or three dozen strong, they can be spread thinly if portfolios are in the tens of thousands.
At the other extreme from the firm with 13,000 stewardship actions, there are equivalent firms – i.e. setting aside the narrow boutiques with concentrated portfolios and inevitably low numbers of actions – which report numbers of stewardship actions in the range of 50-150, with commensurately lower numbers of activities delivered by each stewardship team member.
One manager in our survey reports no fewer than 13,000 individual stewardship actions – nearly 500 actions per member of its stewardship function."
It’s clear that managers are reporting very different things when they report on stewardship activity, as found in our analysis of stewardship code reporting.
One way to get greater bang for the stewardship buck is through membership of key organisations. This provides a mechanism for fund managers to leverage more change, both among the assets in which they invest and throughout the investment industry as a whole. Membership of the Principles for Responsible Investment (PRI) appears to remain an important checkmark for the industry, with only 2% of our sample not being signatories. Similarly, signatory status to one of the proliferating numbers of Stewardship Codes around the world is an increasing expectation, with just under 60% claiming this. Membership of climate-change-focused initiatives is slightly lower, with 47% of managers reporting membership of the global Net Zero Asset Managers Initiative (the industry’s contribution to the Glasgow Financial Alliance for Net Zero) and 52% the regional clubs for the investment industry – the Institutional Investors Group on Climate Change (IIGCC), Ceres, Asia Investor Group on Climate Change (AIGCC) and Investor Group on Climate Change (IGCC).
Disappointingly, diversity matters seem to be less of a priority. Membership of the Diversity Project or a local equivalent is around a third of our sample, and membership of the 30% Club is, ironically, below 30% (24%). The 13% membership of the Standards Board for Alternative Investments looks higher when only managers with exposure to such alternative assets is considered – but it is far from universal among them.
Managers report membership of a wide range of other organisations. Most frequently mentioned were the collaborative engagement vehicle Climate Action 100+, property ESG data standard-setter Global Real Estate Sustainability Benchmark (GRESB), and Farm Animal Investment Risk and Return (FAIRR), the body promoting investor understanding and action on risks associated with industrial farming.
Disappointingly, diversity matters seem to be less of a priority. Membership of the Diversity Project or a local equivalent is around a third of our sample, and membership of the 30% Club is, ironically, below 30%."
Given the need to evidence activity, it is disappointing how few strategies can provide specific data on the stewardship activities delivered on portfolio investments."
Given the need to evidence activity, it is disappointing how few strategies can provide specific data on the stewardship activities delivered on portfolio investments. Across all strategies, only 38% of those surveyed provided statistical data on specific stewardship activities. Even in cases where the strategy is reported as ‘engaging for change’ in its stewardship approach, the level of statistical evidence rises to only just over 50%.
But it's hard not to see this mostly as a function of the relatively lower priority given to the issue. The widest gaps were, disappointingly, on climate (28%) and again on transparency. Data collection on the success of stewardship activities is even more concerning.
Our study revealed that only 22% of strategies overall provided portfolio-specific statistical data on the success of engagement activity – and several of those claim to have delivered substantive change in every single one of their engagements.
Since it usually takes around three years to deliver something genuinely substantive through engagement, this finding seems doubtful, or suggests a lack of ambition in initial targets set. Overall, it appears that under 20% of strategies have engagement activity tracked in a meaningful way that enables the manager to assess the success of its approach, let alone its clients.
Given that, like the Investor Forum, we define engagement as “purposeful dialogue with a specific and targeted objective to achieve change”, we believe that capturing data effectively is a necessary part of a successful stewardship approach. There are now a number of cost-effective tools enabling managers to capture this data, so there’s little excuse for not doing so.
Some 55% of managers provided data on participation in collaborative engagements. As a proportion of their overall activity, this ranges from a minimal 0.03% to (in the case of four managers) a scarcely credible 100% of their total engagement activity – particularly for the three of these managers who report more than 1000 engagement actions.
The gap between assertions and evidence was particularly notable with regard to the issues chosen for engagement activities. Managers were asked to highlight the key stewardship themes that matter for particular portfolios, and each of the themes detailed in the chart is a focus for more than 80% of strategies. However, the evidence of activity doesn’t match up: on average, there was a gap of over 50 percentage points between this statement of importance and a disclosure of the levels of stewardship activity that reflects that importance. Only on board governance and effectiveness was the gap between assertion of importance and evidence of activity less than 50%; the biggest gap was 59%, with regard to transparency and data.
Fortunately, evidence was more abundant at a firm level. We asked which issues were firm-level priorities, and these ranged from 92% for climate to 63% for biodiversity.
The gaps between these assertions of importance and demonstrated activity were much smaller than at the strategy level, but with the average still well over 20% it’s clear that managers still have much to do to demonstrate delivery in practice.
The narrowest gap (15%) was on biodiversity and the widest on data (30%). Managers identified a range of other areas of stewardship focus, with the most popular being remuneration, public health issues, and supply chain oversight.
Voting matters as an indicator of good stewardship practice, but it only applies to the equities asset class. And even there, the dialogue that surrounds any voting decision matters more, and enables the votes to be effective.
Nonetheless, capturing an overview of voting data provides insight into the mindset and approach of managers. Apart from a handful of anomalies, managers cluster along a line showing a close relationship between the number of resolutions and the number of meetings opposed. Those anomalies see certain managers report opposing a much higher percentage of resolutions than the percentage of meetings where they report opposing at least one resolution.
More believable – based on an assessment of the details of their voting policies – are the managers that report opposing at least one resolution at almost every AGM.
Even though surrounding dialogue and engagement matters more than the vote itself, there is a dramatic difference in approach to voting matters between those voting in support of management on almost every resolution at nearly all AGMs and the manager opposing 33% of all resolutions, including opposing at least one resolution at more than 90% of meetings.
