promising signs, but still plenty of room for improvement
Are investment managers delivering on their responsible investment claims?
The results of LCP’s latest Responsible Investment (RI) survey are in. The response rate of 90% is the highest we’ve achieved since we started conducting two-yearly surveys of investment managers’ RI practices in 2011. I’ve also had many managers contact me to provide supplementary information and to discuss their scores, indicating a high level of engagement with the topic. Whilst the distribution of scores – which range from 1 (weak) to 4 (best practice) – is similar to our 2015 survey, this reflects LCP’s increasing expectations rather than a lack of progress by managers. There’s definitely been improvement, very significant for some managers, but the bar is being raised all the time.
120 investment managers completed our in-depth questionnaire last autumn, describing how they take account of environmental, social and corporate governance (ESG) issues in their investment processes and how they exercise stewardship of their clients’ investments by voting at company AGMs and engaging with management to improve long-term investment performance.
Most managers these days say they consider ESG factors and exercise stewardship. But, when you scratch beneath the surface, it is clear that there is a huge range between best and worst practice in this area.
One of the first things I look for is whether the manager is a signatory of the UN-backed Principles for Responsible Investment (PRI). It is rare to find a manager who is good at RI but is not a PRI signatory, as the chart below shows. I was therefore encouraged to see that the proportion of respondents who are PRI signatories has increased from 66% to 78% since our 2015 survey. However, less than half of signatories surveyed (46%) scored three or more in our survey, suggesting that while many are focussing increasing resource and attention on the issue, it is still early days in truly adopting RI practices.
As well as asking managers to describe how they integrate ESG factors into their investment processes, we asked various related questions. Who is accountable for ESG integration? Is ESG included in job descriptions and performance objectives? What training do staff undergo? Certainly in some cases, the answers to these questions were weaker than I would expect if managers are truly embracing ESG integration.
Encouragingly, managers did much better on our questions about voting practices.
Here the first test is whether managers are signed up to the UK Stewardship Code. Among respondents, 96% of relevant managers (ie those who manage UK listed equities) are signatories. Moreover, 83% of these signatories are classified as Tier 1 by the Financial Reporting Council, meaning they have provided a good quality and transparent description of their stewardship approach. This compares to 65% of all investment manager signatories, suggesting that the managers that LCP’s clients invest with are better than average at stewardship.
I was also really pleased to see that managers exercise almost all votes (97%1) and are willing to vote against management or abstain where appropriate (one or more motions at 34% of AGMs1).
Managers scored less well on questions about topical ESG issues. We asked them to describe their policy and provide an example on three issues, one environmental (water scarcity), one social (fair pay) and one governance (board composition). Only around one-third of managers gave a good answer in each case, consistent with my experience that ESG engagement is focused on a few high profile topics, notably executive pay and climate change.
The survey has given LCP a wealth of information about managers’ RI practices which we’re now incorporating into our manager research views and client advice. It’s catalysing more in-depth discussions about RI which I view very positively. RI is a relatively new topic for many, so these discussions are a vital way of sharing insights and building expertise across the investment industry rather than confining it to experts.
If you’d like to know more, download the LCP Responsible Investment Survey publication and speak to your usual LCP adviser to find out how your managers scored in the survey.
1 Averaged across managers answering the question.