Rising expectations leaves a mixed picture for investment managers on ESG issues

by | Jan 18, 2022

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LCP’s latest biennial Responsible Investment Survey of nearly 150 investment managers has highlighted big gaps in board training and oversight on ESG issues. While 69% of managers have mandatory RI training for staff, less than a quarter (23%) have mandatory training for board members. 33% of managers said that they had no one at board director levels with responsibility for the oversight of ESG and stewardship.

LCP are warning that, with policy and societal expectations in this space increasing by the day, ensuring that there is clear senior leadership, knowledge and oversight of ESG issues will be crucial. The survey, which was undertaken in the second half of 2021, assigns managers scores of between 1 (weak) and 4 (strong) based on their responses on ESG issues and their stewardship practices, which include voting rights and engaging with company management. The results show that while many managers are improving their responsible investment practices, they are not all keeping pace with the rapid growth in expectations. As a result, there has been a fall in the proportion who are being awarded the top grades since the previous survey in 2020.

Other key findings in the survey were:

  • Managers are taking ESG issues and stewardship much more seriously. This is apparent from the training provided for staff and the fact that 96% of surveyed managers are now signatories of the UN Principles for Responsible Investment, compared to 66% in 2016. 90% of managers also told us that they engage with policymakers or regulators on industry wide topics.
  • Significant progress has been made in monitoring and assessing climate-related risks. 36% of managers said they had already published a firmwide TCFD report which provides disclosures on the impacts of climate change across their businesses. This is despite there not yet being regulatory requirements in place for them to do so. At the time of the survey nearly half of investment managers (42%) said that they were targeting net zero emissions for assets under management. However, 65% of these managers said they did not yet have a clear plan in place to achieve this target.
  • Voting practices remain strong and continue to improve, but the wider engagement agenda is still skewed towards climate change and governance issues. On average, the listed equity managers surveyed exercised 97% of eligible votes, and voted against management or abstained at least once at 35% of AGMs in the year to 30 June 2021. However, 42% of managers said they didn’t have a formal escalation policy when engagement objectives that they set for companies they invest in aren’t met. The survey shows that managers need to start engaging more on wider social and environmental issues. For example, 43% of managers said they did not engage, or rarely engaged with companies on public health issues.

Claire Jones, Head of Responsible Investment at LCP, commented: “It’s encouraging to see many investment managers stepping up to the plate. The majority are taking ESG issues and stewardship much more seriously, with many making their voices heard through voting and improving reporting on climate change ahead of it being a regulatory requirement. However, its concerning that there is a significant number who don’t have appropriate board oversight, which is out of step with the rapidly increasing expectations in this space.”

Sapna Patel, Senior Consultant at LCP, added: “While it’s clear that addressing climate change is very much on the agenda for investment managers, their net zero commitments need to be backed up by clear plans as to how to meet these targets by 2050, and we would also expect managers to improve reporting of climate-related metrics, where coverage of portfolios is still relatively limited.”

“Engagement should also be a key priority for managers, particularly given the recently strengthened UK Stewardship Code. While there has been some progress in managers’ engagement on certain topics, such as climate change, we were surprised that there are some social issues, such as public health, which many managers rarely consider, particularly given the backdrop of a pandemic over the last two years.”

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