ESG demands shaking up asset management

Environmental, social and governance (ESG) considerations are increasingly driving institutional investors’ selection of asset managers, says new research from Greenwich Associates.

In a new report, the U.S.-based research firm said that, with institutions increasingly integrating ESG factors into their investment processes and portfolios, they are also shaking up their asset manager lineups based on ESG standards.

“In Europe, ESG is virtually ubiquitous, with more than 90% of European institutions now employing ESG, and more than 80% planning to deepen ESG integration over the next three years,” it said, adding that ESG usage has also roughly doubled in Asia and North America over the same period.

In this environment, instead of simply allocating a greater share of assets to ESG-focused funds, around 60% of institutions have integrated ESG considerations into their overall investment philosophy — which has implications across all asset classes, including private markets and real assets alongside public equities and fixed income, the report noted.

“Around the world, these issues are playing a growing role in institutions’ assessment and selection of asset managers,” it said, reporting that its research found almost 90% of European institutions consider ESG factors “very or somewhat important” in manager selection. In Asia, the share is about 75%, and it’s 50% in North America, it added.

“Many of these institutions are evaluating managers’ ESG approaches during the early stages of their manager selection process,” said Mark Buckley, global head of investment management at Coalition Greenwich, in a release.

“Managers who fall short on ESG could be eliminated from consideration early in the process,” he added.

Additionally, the report said that institutions are applying similar scrutiny to their existing asset managers.

As a result, about half of Asian investors and 30% of North American investors, “expect to make ESG-driven manager changes on at least 10% of their assets in the next five years,” it said.

“In Europe, 60% of ESG users expect to shuffle manager lineups based on ESG, with 27% of them predicting that these changes could affect at least a quarter of their assets,” it added.

Against this backdrop, institutional investors are focusing on asset managers’ commitment to ESG and how well they communicate that commitment, Greenwich said, adding that, on a global basis, only 6% of institutional investors say that asset managers currently excel in communicating their ESG approaches.

“To be more effective, managers should put portfolio managers front and center in client communications, clearly articulate how they incorporate ESG in the investment process, and present concrete evidence on impact and investment outcomes, including extensive use of case studies,” said Buckley.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.