Portfolio carbon intensity measure is largely underreported outside of listed equities and corporate bonds due to data limitations and non-standardised reporting frameworks, making it challenging for investment firms to meet stricter environmental, social and corporate governance (ESG) regulations coming into force in 2023, according to the findings of Russell Investments’ eighth-annual ESG Manager Survey of 236 asset managers.
Russell Investments’ survey found that carbon emissions data (87%) is currently the most highly reported ESG metric. Carbon intensity is being reported by most firms investing in listed corporate securities (Listed equity: 86%; Corporate bond – investment grade: 62%; Corporate bond – high yield: 57%). However, very poor data availability or lack of standardised reporting frameworks mean that less than 30% of firms allocating to other asset classes are able to report on carbon-related metrics of their respective portfolios.
Amid increasing ESG-reporting expectations and guidelines for the industry, the survey findings indicate ESG data and reporting continue to be a challenge. Many firms assign qualitative ESG scores, while carbon data is more often scientific based. Among fixed income firms, 41% of survey respondents said they have ESG-related data for developed market sovereign bonds, while only 27% have some form of carbon data in this segment. 20% of fixed income firms have some form of ESG data in the securitised bond market while only 8% of them have some form of carbon data in this segment.
“The results highlight further improvements are still needed around ESG data. In the corporate bonds space, there are still several challenges such as disclosure practices in privately held companies or applying carbon measures in green bonds. Outside corporate issuers, ESG-related reporting continues to evolve in an unstructured fashion due to the absence of clear industry standards. There are some proposed frameworks to account for sovereign issuers’ emissions which is a welcome development”, said Yoshie Phillips, Head of Fixed Income ESG Investing at Russell Investments.
While carbon emissions data captures a snapshot of an entity, the survey reveals a growing trend toward evaluating the energy transition with forward-looking views, as suggested by the increase of asset managers collaborating with industry organisations focused on the energy transition such as the Transition Pathway, the Science Based Targets and the Net Zero Asset Managers initiatives. 26% of the respondents are signatories to the Net Zero Asset Managers initiatives, up from 10% last year.
“During our conversations with asset managers, we often hear about the challenges of third-party ESG data providers’ outputs and how they try to augment it with their in-house forward-looking ESG analysis,” Phillips said. “We are seeing more support for standardised disclosures in key ESG metrics.”
When considering the more stringent SFDR requirements coming into force next year, the survey revealed mixed results in terms of existing products meeting clients’ sustainability preferences under the updated EU MiFID rules. At the time of the research, only a handful of firms were able to meet clients’ preferences for the Principal Adverse Impacts (28%) and sustainable investments (24%), and less so for the EU taxonomy (10%).
Climate risk is the most prevalent ESG issue that investment firms hear about from clients for nearly half (45%) of the respondents, up from 39% in 2021. Climate risk is the dominant issue among respondents in Canada, the United Kingdom and Australia. In Europe, climate change combined with wider environmental issues top the list of investors’ concerns. 68% of managers globally identify climate change/environmental issues as their clients’ top ESG concern, up from 60% in 2021.
Findings show investors are very much focused on climate and environmental issues more broadly, and other ESG issues do not resonate nearly as strongly anywhere. Among other ESG issues, U.S. respondents reported relatively higher engagement from clients on issues related to diversity, equity and inclusion (DEI).
The survey also shows growing efforts to incorporate DEI practices in asset management. Among those reporting their DEI statistics, 54% have less than 20% women and 40% have less than 20% ethnic minorities in their investment teams. Meanwhile, 4% of the respondents have more than 40% women and 17% have more than 40% ethnic minorities in their investment teams.
“DEI demographic data disclosure is scarce in the industry, and we found that gender disclosure is generally greater than ethnic minority status. Recognising the regulatory differences where reporting such data is discouraged in certain countries and the global definitional challenges, having this DEI data set allows us to monitor progress as well as give us a better sense of the overall demographic of the industry.” Phillips said.
Russell Investments’ annual ESG manager survey offers a broad representation of the industry by asset size, region and investment strategy offerings. About 30% of the 236 respondents have less than $10 billion in assets under management (AUM), while 33% have more than $100 billion in AUM. In terms of products, 184 offer equity strategies,147 offer fixed income strategies, 77 offer private markets strategies and 66 offer real assets strategies.
Yoshie Phillips, Head of Fixed Income ESG Investing at Russell Investments commented:
“This year’s results reveal that the ESG journey is continuing at a markedly escalated pace, with regulators across the globe aggressively stepping in to try defining sustainable investing and to increase disclosure requirements, and asset managers trying to keep up. In that process, more discussions are happening among the asset management community to address the challenges, especially around ESG data and reporting standard frameworks. Our survey also indicates client demand and risk mitigation are among the key reasons that asset managers are integrating ESG factors into investment processes.”
Jihan Diolosa, Head of Global ESG Strategy at Russell Investments, concluded:
“As ESG integration reaches universal recognition within the asset management community, there remains a very diverse range of views as to how these considerations should be addressed. In addition, we see significant variation in the underlying client needs which asset managers are having to cater for. This poses a real challenge for managers – one of the big issues identified in our survey – and has led to a rapid growth in the number of ESG and sustainable solutions as investment providers seek to meet these needs. An in-depth understanding of these approaches, their merits and limitations is now more important than ever to help investors meet their long-term goals.”