Environmental, social and governance (ESG) considerations and stewardship have risen up the agenda in recent years, but are investment managers doing all they could in this area? Leading pensions advisory firm LCP finds improvement in investment managers’ attitudes, but still some way to go on meaningful action.
Responsible investment has hit the mainstream and there is greater engagement on ESG issues than ever before. These trends are borne out by LCP's Responsible Investment Survey which also identifies areas where progress needs to be made.
The biennial analysis sees LCP invite a wide selection of investment managers to complete an in-depth survey about responsible investment (RI). Each manager’s response is then analysed and assigned a score between 1 (weak) and 4 (strong).
Matt Gibson, partner at LCP and head of investment research, said: “There are assumptions that RI is going on behind-the-scenes, but we want to bring greater transparency to ESG and stewardship issues.
“Improvements are being made but, when we scratch beneath the surface, it’s clear that there is a huge range between best and worst practice. For some, lip service now needs to translate into meaningful action. Publicly-stated commitment is a good first step, and helps to hold people accountable, but action is needed to match the rhetoric.”
Of the 120 managers surveyed, only 8% received the top score in the survey, whereas 20% were awarded the bottom score, hinting at the range of attitudes that exist.
LCP explicitly asked managers whether they consider ESG issues in their investment process across six asset classes: equities, government bonds, non-government bonds and loans, property and infrastructure, multi-asset strategies, and ‘other’. Worryingly, 35% said they did not for at least one relevant asset class.
There are overall signs of improvement, though, as 34% of investment managers said that there is a dedicated individual who oversees and is held accountable for ESG and stewardship issues at board level. Managers are also exercising a high proportion of voting rights, and voted against company management (or abstained) for at least one motion at 34% of AGMs.
In addition, 78% of respondents confirmed that they are signatories to the UN-backed Principles for Responsible Investment, the key ‘code of conduct’ in this area. This is a significant improvement on the 66% recorded in the 2015 survey.
Claire Jones, Senior Consultant specialising in responsible investment, added: “Our survey shows that being a PRI signatory is necessary, but not sufficient, for managers to demonstrate good responsible investment practices across their services. A specific area for improvement is climate change – the most prominent ESG issue – for which investment managers had a surprisingly weak showing in our survey.”
“Investment managers are keen to talk about responsible investment issues – that’s a huge positive and is reflected by the high response rate our survey achieved. We are now encouraging trustees to review their managers’ approach to RI, so that delivery can be measured,” said Gibson.
Jones added: “To drive this agenda forward we hope – and indeed expect – to see improvements in board level accountability, better analysis of ESG risks at portfolio level made available to clients, engagement on a wider range of ESG factors, as well as more meaningful action to address climate-related risks.”