Asset managers are increasingly advertising their commitment to environmental, social, and governance issues — but how committed are they really?
Research firm Cerulli Associates has found that while a growing number of U.S. firms have pledged to use ESG criteria in their investment processes, these criteria are rarely mentioned in official descriptions of their investment products.
The Boston-based firm estimated that 88 percent of total U.S. public market assets are affiliated with a signatory of the United Nation’s Principles for Responsible Investment, six principles that include a commitment to “incorporate ESG issues into investment analysis and decision-making processes.” The vast majority of these signatories, representing 90 percent of PRI-affiliated assets, broadcast their ESG capabilities on their websites or elsewhere, according to Cerulli.
Yet when Cerulli analyzed official product documentation, such as fund prospectuses, funds that purported to factor ESG criteria into investment decisions only made up 4.5 percent of PRI signatory assets.
“Many asset managers shy away from documenting that ESG factors inform investment decisions,” Cerulli director Michele Giuditta said in a statement. She pointed to a number of obstacles cited by asset managers, including client unfamiliarity with ESG factors, the perception that ESG funds underperform, and the “difficulty defining the boundaries of ESG.”
“In addition, the United States has not seen the same level of push for regulatory changes around ESG considerations from its government, as compared to countries across Europe — another major barrier to formal commitment,” Cerulli said.
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Still, almost all asset managers surveyed by Cerulli claimed to incorporate ESG issues into their investment decision-making, even if it is not formally part of their fund strategies. Eighty-nine percent claimed to take an ESG integration approach, in which portfolio managers consider environmental, social, and governance factors as part of a company’s overall value proposition.
An increasing proportion of managers also report practicing active ownership — defined by Cerulli as “having a dialogue with companies on ESG issues and exercising both ownership rights and voice to promote change.” Seventy-two percent of surveyed managers told Cerulli they engaged in these activities, up from 54 percent in 2017.
Other popular approaches included negative and positive screening, in which funds exclude or include stocks based on ESG criteria. Less widespread were impact investing and community investing funds, offered by 38 percent and 19 percent of polled managers, respectively.
One “significant” challenge still faced by asset managers, according to Cerulli, is a lack of reliable ESG data. Surveyed managers complained of limited ESG disclosures by companies and “insufficient” data from third-party providers.
Inconsistency across ESG ratings was another issue. “Several asset managers tell Cerulli that they are using data from multiple providers in conjunction with proprietary data to develop a view on ESG risk and opportunities,” the report said.
Despite the challenges of ESG implementation, asset managers reported having several different types of ESG products in development. Funds targeting the “E” factor were most popular, with 31 percent of surveyed managers developing funds focused on climate change or carbon emissions. Another 29 percent were developing products for fossil fuel divestment, while 27 percent were targeting exposure to sustainable natural resources or agriculture.
The most popular non-environmental issue was gender, with 26 percent of managers developing funds to invest in women-led or gender-balanced businesses.
In its statement, Cerulli noted that PRI membership by U.S. asset managers is a “more recent phenomenon,” with more than two-thirds of U.S. signatories adopting the principles in just the last five years.
“We are in the beginning stages of adoption, with many firms just starting to build their ESG integration processes,” Giuditta said.