New research from Redington reveals that, despite positive strides from asset managers regarding ESG policies and processes, there remains a notable lack of decisive action on sustainability issues.
As part of its annual Sustainable Investment (SI) Survey, the investment consultant engaged with 122 managers across a range of geographies, covering 232 strategies and an aggregated $37.7trillion in combined assets under management.
This year’s findings include encouraging signs that managers are continuing to strengthen integration and stewardship efforts across several key areas.
Almost every manager surveyed (98%) now has a firmwide ESG policy, with 80% employing dedicated ESG or sustainable investment staff. More than half (52%) of respondents say they also provide ESG training and updates to employees on an annual basis, while some 35% provide such training at more regular intervals.
The study also suggests that, most of the time, across most asset classes, investment recommendations are being influenced by ESG factors. For example, 78% of equity managers and 84% of fixed income managers state that environmental issues impact analyst recommendations in most cases.
At the same time, the continued growth in client demand for ESG has led firms to refine their ESG integration approach, with 61% of managers having made changes over the year.
But despite clear good intentions, the research also shows that in many cases, these are failing to translate into tangible action.
Notably, 43% of managers are unable to provide an example of a sell decision driven by an ESG view in the last year, compared with 39% in the 2021 report. At the same time, 35% cannot evidence an ESG-motivated buy decision, up from 26% last year. Moreover, only 57% stated that they have an exit strategy in place to respond to negative ESG performance.
Nick Samuels, Head of Manager Research at Redington, commented: “With climate change, the cost-of-living crisis and geopolitical uncertainty all at the forefront of our minds, the interconnectivity between the financial system, society and the planet are increasingly clear. For asset managers, being a responsible steward of capital means creating long-term value for clients and their beneficiaries – and one way to do so is through thoughtful engagement on material topics.
“What matters the most here is changing investment practices on the ground. So while it is encouraging to see managers making such strides in their processes and philosophies, there is a long way to go when it comes to taking actions for real-world outcomes that are truly going to move the dial on some of the most challenging sustainability issues of our time.
“While we would expect to see some variation between ambition and action, how can managers really drive the change that is needed when so many are unable to evidence specific allocation decisions that were influenced by ESG factors this past year?”
The study reveals a marked fall in the number of managers aligning remuneration policies with sustainable investment metrics. Just 62% of managers are taking this approach, down from 70% in the 2021 report.
He continued: “Perhaps the clearest indication that sustainable investment is truly integrated is if individuals are incentivised on it. We believe this approach has potential to drive significant progress, and so we hope to see a reversal in this downward trend next year.”
The research also analyses the outcomes of manager engagement, particularly those identified as ‘Engagements for Change’, which can be characterised as purposeful dialogue with defined objectives to positively address material risks and opportunities.
Managers classified 32% of all strategy-level engagements and 22% of firm-level engagements as Engagements for Change. Looking at the results of reported Engagements for Change, it is evident that firm-level approaches have more success, with engaged entities either developing credible strategies to achieve the stewardship objective or fully implementing a solution to address the issue (43% firm vs. 28% strategy).
He continued: “While this data exemplifies the power of the house and coordinated internal efforts to influence real-world change, most engagements for change reported do not as yet seem to result in tangible outcomes.
“This activity may be a stepping stone to later progress but, ideally, managers should have mechanisms in place to hold engaged entities to account, including appropriate escalation routes in the event of inaction or a negative response. If the existing engagement truly is a stepping stone, managers need to be able to track the later progress”.
Redington believes that to truly move the dial, the investment industry at large must collaborate with the asset management community to promote and effect change.
Nick Samuels concluded: “While our survey evaluates the sustainability and stewardship efforts of asset managers, the responsibility does not lie with them alone. Through this survey, and in collaboration with our clients, partners and industry peers, we hope to catalyse the large-scale action required to solve the sustainability challenges we all face.”