13 January 2020
We have carried out our fifth biennial of investment managers. The results are in from 137 managers, nearly all of the major institutional investment managers in the UK. What do they tell us about how managers are faring in a world with a rapidly increasing focus on RI? Here are just some of the high… and lowlights.
Managers appear to be taking RI more seriously, as demonstrated by board-level accountability for the issue at 81% of the managers surveyed, much higher than in our previous survey. Alongside this, there is also evidence of an increase in the amount of RI training given to investment professionals.
ESG data, or more specifically its quality or lack thereof, is a hot RI topic. Given the importance of the issue, I take some reassurance from our finding that half of managers extensively adjust data sourced from third parties, using the information only to support their own in-house research.
Stewardship is on everyone’s radar, particularly following the recent regulatory changes and the updates to the UK Stewardship Code. Equity managers in particular are able to tangibly demonstrate their value-add in this area is by exercising their voting rights. Pleasingly, managers exercised 95% of their votes over the year to 30 June 2019.
Managers are also increasingly demonstrating their alignment with, and support for responsible investment, by signing up to various codes. Notably, the vast majority of managers are now signatories to the – 88% now, up from 66% four years ago.
Despite the progress made by managers in a range of areas since our last survey in 2018, there is still significant room for improvement. Although most investment managers now claim to be committed to RI, almost a third of managers still don’t systematically consider ESG factors as part of their investment process across all asset classes.
The results for climate change are particularly worrying, given the widespread acknowledgement that it poses significant risks to the financial system and, of course, to society as a whole. We asked managers to describe their approach to engaging with company management and policymakers on this issue and to give an example of recent engagement – only around half gave a reasonably detailed description of their approach while a similar number gave a good example of a climate change engagement.
Disappointingly, this low level of engagement activity wasn’t restricted to climate change, with less than a quarter of respondents providing a decent description of their approach to fair pay across the workforce – the equivalent figure for Board diversity and composition was 40%. These are surprisingly low figures, given the high-profile nature of these topics.
And an area that hasn’t improved nearly as much as I would have hoped since last time is the analysis of portfolios’ aggregate exposure to ESG risks – this isn’t being carried out, or even developed, for almost a quarter of asset classes across the managers who completed our survey. So, for a significant minority of strategies, consideration of ESG risks seems to be limited to security-level analysis, or not at all. This could be problematic – the concentration of exposure to particular ESG factors may be missed by managers that don’t consider portfolio-level risks.
So how are managers doing overall and why does it matter?
As you would anticipate, given the greater focus on RI in recent years, there has been a general improvement in manager performance in almost all areas we cover in our survey (even if it didn’t go as far as I would expect in some). For example, the average overall score for managers in this report was 2.6 (where 1 is weak and 4 is strong), an improvement from 2.3 in our 2018 survey.
But underlying these averages is a large dispersion amongst managers. It’s important that you know if are lagging, or if there are particular areas of concern to address. A lack of attention to RI may indicate missed opportunities for improving returns and reducing risk for investors.
What should you do next?
These days, most investment managers have an RI policy and standard responses to questions on the topic. However, how much of it is just talk with no substance? How do you know that what managers are telling you they do is actually evidenced in their portfolios?
Quite simply, engage with them, with the help of your adviser. Our RI survey shows that better insights come from asking better, more detailed questions. Ask your managers for specific, recent examples of engagement, or have them describe how they address a particular ESG challenge in their stock selection and portfolio design. And challenge them if you don’t like what you hear.