Asset managers prioritise engagement with underlying investments/asset owners identify climate change as top ESG concern

Asset managers are placing greater emphasis on active ownership of their investments and increasingly engaging on environmental, social and governance (ESG) issues with the underlying companies in their portfolios, according to a newly released survey conducted by Russell Investments.

As reported by our sister title, Insurance Asset Management, nine in 10 respondents (90 per cent) said they cover ESG in meetings with the senior management of companies that they invest in, up from 80 per cent in the 2018 survey. Overall, 35 per cent of respondents report they always cover ESG in their meetings, up from 21 per cent in 2018.

Russell Investments’ seventh annual global ESG Manager Survey reflects the views of 369 asset managers, representing US$79.6trn in assets under management across a broad range of asset classes including equity, fixed income, real assets and private markets.

Survey respondents said they hear from clients more on climate risk/environmental issues (60 per cent) than any other issue, followed by diversity and inclusion/social issues (20 per cent). While climate risk/environmental issues topped the client-engagement list globally and in all regions, including 97 per cent of respondents in Continental Europe, US respondents were more balanced with 46 per cent selecting climate risk/environmental issues and 29 per cent picking diversity and inclusion/social issues.

Similar to previous years, managers continue to rank “governance” (80 per cent) as the most important ESG factor that impacts their investment decisions, reflecting the importance of company management in delivering long-term enterprise value regardless of industries.

Meanwhile “environmental” has increased over the past four years from 5 per cent in 2018 to 14 per cent in this year’s survey. This steep rise reflects the increased focus on tackling climate risk as well as the impact of regulations. It is mostly attributable to managers in Continental Europe, where 30 per cent selected this factor (up from 4 per cent in 2018) and Canada, which rose from 4 per cent in 2018 to 27 per cent this year. “Social” continued to lag at 6 per cent, which was roughly in line with the 2020 survey results. Although social issues such as diversity equity and inclusion, healthcare availability, and affordable housing have received greater attention during the COVID-19 pandemic, social factors are harder to quantify and there are very few investment opportunities directly tied to these issues.

Russell Investments’ survey also found asset managers are increasingly incorporating ESG-specific considerations into their investment activities. Over 80 per cent of managers surveyed explicitly incorporate qualitative or quantitative ESG factor assessments into their investment processes. This is reflected in the extent to which ESG factors are now influencing investment decisions, particularly with respect to risk. Forty-six per cent of respondents noted the material role ESG factors such as climate change play in assessing potential security risk (an increase of 11 per cent since 2018). Furthermore, 29 per cent of managers highlighted the influence of ESG considerations in driving positive returns, a rise of 9 per cent since 2018.

Indeed, almost all regions surveyed showed a steady uptick in the extent to which ESG considerations are regularly embedded into investment practices. Every UK manager surveyed said they now integrate ESG into their investment processes, a 13 per cent jump from 2020, and 97 per cent of managers in Continental Europe said likewise. While managers in the US lag in this regard, the percentage among US respondents has grown from 67 per cent in 2019 to 82 per cent in this year’s survey.

While ESG factor integration is seemingly approaching its peak globally, investment professionals specialising in sustainable and responsible investing are in high demand. Firms have invested in resources across the industry, with sizeable percentage increases in the number of dedicated professionals who spend more than 90 per cent of their time on ESG matters. In Europe almost nine in ten asset management firms have dedicated ESG professionals (88 per cent), followed by the UK with 63 per cent.

Overall, the 2021 survey reveals that an increased number of firms are actively increasing their efforts with respect to ESG initiatives and are adding dedicated ESG or responsible investing personnel, particularly those firms with larger assets under management.

Commenting on the findings of the 2021 ESG Manager Survey, Yoshie Phillips, director of investment research – global fixed income, said: “ESG integration within asset management investment and business practices has continued to evolve at a fast pace, with forward-looking materiality assessments being the key consideration. Asset managers are applying more rigorous ESG-related analysis and seeking to provide greater transparency. However, there is still much progress to be made, particularly with respect to climate change, which is increasingly defining ESG agendas and ranks as the number one concern among underlying clients.”

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