Asset managers, a long way to 360° ESG-ness

Claudio Bocci, partner, and Gianmatteo Guidetti, Principal, Prometeia

July 5, 2021 | Prometeia

The asset management industry is marching towards integrating sustainability into all its day-to-day aspects, with ramified and increasingly wide-ranging impacts across all functions becoming ingrained in its DNA.

Though this process, which certainly takes time, still involves less than 50 percent of assets under management (AUM), according to our surveyed sample of investment firms (27 asset management companies managing €17.9trn assets), with an inverse relationship between the manager’s size and the incidence of sustainable managed assets on total AUM.

In terms of approaches, sustainability currently runs on three main tracks: integration, exclusion and active ownership; more selective strategies – like best in class or impact investing – are marginal although potentially more easily associable with sustainability.

The sustainable path has brought the majority of management companies to invest not only in processes and data but also in raising awareness across all functions and developing a culture of sustainability through periodic training and, to a lesser extent, linking variable remuneration to sustainable goals. Investment professionals involved in ‘sustainability management’ represent more than half of the front office, supported by specialised teams that are growing in size, reflecting on the one hand the increased presence of sustainability in investment processes, on the other the need to dig further data provided by third parties and to have the possibility to review internal ESG ratings with the desired frequency (at least twice per quarter for the majority of large-sized managers).

The adoption of sustainable strategies – it is worth noticing – does not necessarily imply the inclusion of these issues at all stages of the investment process: indeed, in about 50 percent of the cases, these issues come into play for less than half of the assets under management: in particular, scenario analysis and duration allocation are the investment phases where sustainability is less frequently included at all. When considered, sustainable data have the same relevance than financial factors, with the exception of exclusion strategies and impact investing where they are more relevant.

In the post investment phase, the monitoring of ESG KPIs by the risk management function is not to be considered a given, being not carried out by as much as one third of the sample. Flexibility of the process should also not be taken for granted, as about half of the companies would not be able to include client-specific ESG constraints in bespoke mandates.

With regard to active ownership, one of the fastest growing approach, there is extensive reliance on third parties to carry out the activity although firms generally retain some form of control within the delegation. By numbers there is approximately a 1:75 ratio between engagements and voted resolutions, with social issues representing ‘Cinderella’ in the broader ESG context. Moreover, while disclosure on figures can be considered satisfactory, there is a long way to go with regard to the provision of regular disclosure on active ownership activity.

Even though years practicing sustainability can be a first proxy to estimate the ‘sustainability dimension’ of an asset manager, further analysis should be carried out to get an all-round assessment.

Prometeia has thus developed a methodology to assess the soundness of processes, team and company culture through its ESG-AM score, a synthetic index to facilitate the inclusion of qualitative aspects in selection and monitoring processes. According to our analysis, about half of the firms are properly structured to offer investors a good sustainable investment practice, with some variability by size and headquarter domicile.

Crossing size with ESG-AM score it is then possible to identify five clusters that outline the different positioning of the managers:

  1. Trustable: large managers, mainly applying ESG integration with a robust value proposition in the sustainable field
  2. Active Sustainable: medium sized firm, mainly implementing active ownership or impact investing with a competitive positioning by ESG-AM score
  3. Specialised boutique: small managers who opt for ESG integration, active ownership and impact investing marking a very good score
  4. Laggard: medium sized firms, mainly active in ESG integration but with some gaps to stand out in the competition
  5. Opportunistic: large companies, mainly adopting screening

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