How is ESG influencing investment behaviours?

Asset managers prioritise engagement with underlying investments, while asset owners identify climate change as their top ESG concern. Those are just some of the findings from Russell Investments’ seventh annual global ESG Manager Survey as we highlight the detail which advisers will want to know.

Asset managers are placing greater emphasis on active ownership of their investments and increasingly engaging on ESG issues with the underlying companies in their portfolios, according to a recent survey conducted by Russell Investments.

Nine in ten respondents (90%) said they cover ESG in meetings with the senior management of companies that they invest in, up from 80% in the 2018 survey. Overall, 35% of respondents report they always cover ESG in their meetings, up from 21% in 2018.

Russell Investments’ seventh annual global ESG Manager Survey reflects the views of 369 asset managers, representing US$79.6 trillion in assets under management across a broad range of asset classes including equity, fixed income, real assets and private markets. The survey, conducted by the firm’s investment manager-research team, assesses managers’ attitudes toward responsible investing and how they integrate ESG factors into their investment processes.

  • 90% of respondents in Russell Investments’ global survey of 369 asset managers include ESG in discussions with underlying investments.
  • 60% of managers globally identify climate change/ environmental issues as their clients’ top ESG concern.
  • 80% of managers highlight governance as the most important ESG factor but Continental European managers put greater focus on environmental issues.
  • 100% of UK respondents incorporate ESG factor assessments into their investment processes.

What’s driving investors’ interest?

Survey respondents said they hear from clients more on climate risk/environmental issues (60%) than any other issue, followed by diversity & inclusion/social issues (20%). While climate risk/environmental issues topped the client-engagement list globally and in all regions, including 97% of respondents in Continental Europe, U.S. respondents were more balanced with 46% selecting climate risk/environmental issues and 29% picking diversity & inclusion/social issues.

Governance to the fore

Similar to previous years, managers continue to rank “governance” (80%) as the most important ESG factor that impacts their investment decisions, reflecting the importance of company management in delivering long-term enterprise value regardless of industries. Meanwhile “Environmental” has increased over the past four years from 5% in 2018 to 14% in this year’s survey. This steep rise reflects the increased focus on tackling climate risk as well as the impact of regulations. It is mostly attributable to managers in Continental Europe, where 30% selected this factor (up from 4% in 2018) and Canada, which rose from 4% in 2018 to 27% this year. “Social” continued to lag at 6%, which was roughly in line with the 2020 survey results. Although social issues such as diversity equity and inclusion, healthcare availability, and affordable housing have received greater attention during the COVID-19 pandemic, social factors are harder to quantify and there are very few investment opportunities directly tied to these issues.

ESG influencing investment decisions

Russell Investments’ survey also found asset managers are increasingly incorporating ESG-specific considerations into their investment activities. Over 80% of managers surveyed explicitly incorporate qualitative or quantitative ESG factor assessments into their investment processes. This is reflected in the extent to which ESG factors are now influencing investment decisions, particularly with respect to risk. 46% of respondents noted the material role ESG factors such as climate change play in assessing potential security risk (an increase of 11% since 2018). Furthermore, 29% of managers highlighted the influence of ESG considerations in driving positive returns, a rise of 9% since 2018.

Indeed, almost all regions surveyed showed a steady uptick in the extent to which ESG considerations are regularly embedded into investment practices. Every UK manager surveyed said they now integrate ESG into their investment processes, a 13% jump from 2020, and 97% of managers in Continental Europe said likewise. While managers in the U.S. lag in this regard, the percentage among U.S. respondents has grown from 67% in 2019 to 82% in this year’s survey.

Resources are increasing

While ESG factor integration is seemingly approaching its peak globally, investment professionals specialising in sustainable and responsible investing are in high demand. Firms have invested in resources across the industry, with sizeable percentage increases in the number of dedicated professionals who spend more than 90% of their time on ESG matters. In Europe almost nine in ten asset management firms have dedicated ESG professionals (88%), followed by the UK with 63%.

Overall, the 2021 survey reveals that an increased number of firms are actively increasing their efforts with respect to ESG initiatives and are adding dedicated ESG or responsible investing personnel, particularly those firms with larger assets under management.

Commenting on the findings of the 2021 ESG Manager Survey, Yoshie Phillips, Director of Investment Research – Global Fixed Income, said:

“ESG integration within asset management investment and business practices has continued to evolve at a fast pace, with forward-looking materiality assessments being the key consideration. Asset managers are applying more rigorous ESG-related analysis and seeking to provide greater transparency. However, there is still much progress to be made, particularly with respect to climate change, which is increasingly defining ESG agendas and ranks as the number one concern among underlying clients.”

Jihan Diolosa, Head of Responsible Investing, added:

“In last year’s study, we noted that ESG is no longer an optional ‘add on’ but rather an essential part of decision making. Asset managers have certainly taken this to heart, which is reflected in the improvements we have continued to see over the last twelve months. We are also starting to see the potential beginnings of an evolution in how managers prioritise ESG in several regions, most notably Continental Europe and Canada, increasingly focusing on environmental factors, which is largely being driven by clients. With climate change in particular becoming such a critical issue, managers will have to demonstrate a clear focus and active efforts to make improvements in this area or risk being left behind.”

For more information about the survey visit Russell Investments’ 2021 ESG Manager Survey.

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