Allocators Increasingly Evaluate Managers Through an ESG Lens

October 29, 2020 — Boston

ESG is becoming a more important component of winning and losing investment mandates

For all asset managers, not just those offering environmental, social, and governance (ESG) products, a growing pool of allocators and investors believe that consideration of ESG factors can provide better risk-adjusted returns over the long term, according to Cerulli’s latest research, U.S. Environmental, Social, and Governance Investing 2020: Shifting Environmental and Social Systems Push Asset Managers to Get More Responsible. The vast majority (88%) of asset owners place at least moderate importance on asset managers having ESG capabilities and 77% of investment consultants rate it as at least somewhat important.

Nine of the top-10 consultants use a formal ESG rating process or take ESG considerations into account as part of the overall manager recommendation. Similarly, more than one-third (39%) of institutional asset owners score investment managers based on their ESG integration approach. More than half (54%) of asset owners surveyed incorporate ESG considerations into their investment decision making to align investment objectives with organizations’ values. Other reasons cited include risk mitigation (45%), reflecting stakeholders’ interest (44%), and fiduciary duty (43%).

Allocators are placing high priority on managers having an ESG integration process. “Allocators are evaluating asset managers’ ability to judge the risk and opportunity associated with material ESG considerations and apply them to sound investment decision-making,” remarks Michele Giuditta, director. According to the research, exactly two-thirds of asset owners surveyed have an ESG integration process and consider ESG factors when selecting investment managers.

Asset owners place top importance on asset managers having an articulated mission toward culture in and diversity (34%). “Allocators are digging deeper into asset managers’ diversity and inclusion policies and practices, collecting metrics around racial, ethnic, and gender diversity make-up at firms, particularly among senior leadership roles,” according to Giuditta. “Many organizations are requesting numbers and transparency into current state and desired future state to be able to track progress,” she adds. Other criteria they are using to evaluate managers include quality of ESG integration approach (29%), senior leadership accountability (28%), datasets to inform decisions (26%), and active ownership records (25%).

To help maintain existing business and win new mandates, managers need to display consistency and commitment at the firm level. “The number of asset owners taking ESG criteria into account as part of their manager selection and termination process has steadily increased over the last five years,” says Giuditta. “Managers advertising their ESG capabilities need to display consistency and commitment at the firm level, demonstrating how the firm incorporates ESG criteria and providing transparency into active ownership activities—proxy voting, engagement, and shareholder resolution activities—to show alignment with the firm’s stated beliefs and views,” she concludes.

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