The rapid growth of ESG and sustainable investing does present challenges for the asset management industry, but a recent survey of ESG experts in boutique asset management firms in the UK and Europe has shown that such firms face particular risks and opportunities in the field of ESG.
A survey conducted by the Independent Investment Management Initiative (IIMI), an industry think tank representing close to 40 boutique asset managers, has revealed that 66% of participants believe greenwashing is a major problem for the funds industry.
The research – Asset managers: Key ESG trends in 2023 – shows that regulators agree with this sentiment.
In a ‘Dear CEO’ letter penned by the UK Financial Conduct Authority (FCA) in 2021, the regulator gave several examples of ESG-focused funds whose ESG credentials it believed were somewhat questionable.
For instance, one so-called sustainable investment fund, said the FCA, had substantial exposure to high-emitting energy companies, yet did not seem to be undertaking any stewardship activities (e.g. by encouraging the companies to transition to net zero).
If such behaviour is allowed to go unchecked, investor trust in ESG and sustainability funds will be eroded, the report stated.
As well as introducing new regulations, the authorities have taken action against managers whose ESG conduct has fallen below expectations. In 2022, the US Securities and Exchange Commission (SEC) fined the asset management arm of Goldman Sachs $4m for policy and procedural failures around its ESG research.
Prior to this, according to the report, BNY Mellon was struck with a $1.5m fine from the SEC for allegedly misstating and omitting information about ESG across some of its mutual funds.
With regulators putting managers’ ESG credentials under the spotlight, boutique firms should exercise caution when making claims about ESG or sustainability. Managers also need to clearly articulate their ESG or sustainability objectives to clients, so as to avoid any confusion, IIMI continued.
Although many regulators have made progress on ESG regulation, the lack of alignment and dialogue between the different market supervisors is a problem. Again, this deficiency is recognised by IIMI’s membership: 91% of IIMI members complained that ESG/sustainable finance regulations are too fragmented across different jurisdictions.
The EU has imposed the Sustainable Finance Disclosure Regulation (SFDR), the FCA is consulting on the Sustainable Disclosure Requirements (SDR). Both sets of rules are designed to strengthen the underlying transparency of sustainable investment products and funds, but there are nuances between what the UK and EU are doing, the IIMI noted.
It is clear the authorities need to become more consistent in terms of how they supervise ESG and sustainable investing, the IIMI said, adding that a failure to do so will result in confusion prevailing at investment firms and their clients.
Robeco and Partners Group publish sustainability reports
Asset management firms Robeco and Partners Group have released their respective sustainability reports this morning, with the former outlining its materiality analysis and the latter highlighting its ESG performance across its investmetn portfolio.
Robeco’s 2022 Sustainability Report also details how the firm integrates sustainability into its business, how it serves clients with sustainable investment solutions and the way in which it performs its active ownership activities. One of the highlights in 2022 was the launch of Robeco’s Sustainable Investing (SI) Open Access Initiative through which the firm opened its Sustainable Development Goal (SDG) data to a community of academics and clients, as a first step.
Menawhile, Partners Group’s Corporate Sustainability Report detailed the firm’s consolidated efforts into one overarching sustainability strategy articulating the manager’s commitment to creating lasting positive impact.
The strategy sets out the firm’s key ESG focus areas at both portfolio and corporate level. These include tackling climate change, realising employees’ potential, and achieving ownership excellence and sustainability at scale. Each of these areas has related targets and projects attached to enable the firm to focus on impact and track progress over time.
LGIM strengthens engagement efforts
Legal & General Investment Management (LGIM) is strengthening its engagement efforts in 2022, focusing on climate change, public health, pay and diversity, it announced in its annual Active Ownership report.
Published today, the global report revealed that LGIM cast over 171,000 votes at over 15,750 meetings in 2022 as it continues to drive positive progress to support the long-term sustainability of the economy, environment and society at large.
As companies worldwide grappled with the fallout of Russia’s invasion of Ukraine, inflationary pressures, and volatile markets, LGIM continued to engage with companies – and hold them to account – on the most critical issues including climate change, biodiversity, health and board diversity whilst striving to raise standards.
In 2023’s annual general meeting season, LGIM will prioritise its engagement activity on six super themes: people, nature, health, technology, governance and climate.