More and more, asset managers are using environmental, social, and governance factors to evaluate investments — in spite of the recent backlash. Some are even using ESG metrics in their compensation plans, according to a report by portfolio management platform Vidrio Financial.
Asset managers were increasingly supportive of ESG investing before they were met with politically charged resistance to it this year, which led to relatively small divestments by some asset owners and legislation barring the money management approach.
Some reports have suggested that the anti-ESG pressure was working, as some asset managers reduced their efforts to fight climate change. But based on Vidrio’s survey of leaders at asset managers, OCIOs and fund-of-funds predominantly based in North America, the politicization of ESG hasn’t materially impacted how some firms are operating. In fact, they are leveraging ESG more than ever.
“Despite the ongoing debate and political pressures in certain regions around the world on ESG, Vidrio Financial continues to see increased focus on improving manager research processes and data monitoring around sustainability, especially as it relates to assessing long-term growth prospects,” said Federico De Giorgis, president at Vidrio Financial.
In 2023, 64 percent of the portfolio managers and others surveyed by Vidrio said they were using ESG factors to weigh the risk and opportunity of investments, up from 38 percent in 2021. Fifty-four percent also said that ESG is a "key factor" for their clients — roughly twice as many as two years ago.
The results weren’t surprising to Vidrio. “Given the rising complexity of the investing landscape, asset allocators have incorporated ESG frameworks within their due diligence processes. We fully expect this trend to continue,” said Gygmy Gonnot, managing director at Vidrio Financial.
Anti-ESG rhetoric and actions were “just a bit of a blip in the progress” during the past year, said Mark Fox, a partner at NMG Consulting, which counts asset managers, insurance companies, and other investors as clients. Any declining interest by investors is often attributable to an organization resetting its definitions of ESG, which Fox said was a positive sign of the evolution of ESG factors and their use.
Some asset managers also seem to have started using ESG performance metrics to determine how they pay employees. In 2023, 37 percent of Vidrio’s survey participants said their company considered ESG performance metrics as part of compensation plans, and 15 percent said they plan to consider them in the future. In 2021, no respondents considered it.
Tying employee compensation to ESG objectives has the potential to be hugely impactful, but consultants cautioned against celebrating the survey results too much. The respondents didn’t reveal how exactly they are incorporating ESG metrics into compensation, how significantly they impact overall pay, or which employees are subject to them. Amanda Walters Nelson, a principal at Casey Quirk, a consultancy for asset managers, was skeptical about it being a trend in the industry yet.
“You can consider almost anything as a factor in discretionary compensation,” she said.
NMG’s Fox encouraged investors to ask asset managers claiming to use ESG factors to show them how they do it (private equity firms are especially poor at this, research shows). He recommended the same scrutiny of firms claiming that ESG is part of their compensation plans. Still, he was intrigued that asset managers were revealing any information about it.
“Whatever the percent is, I think anything above zero is pretty interesting,” Fox said.
