Sustainability: influencing change across the investment industry

The COP26 summit has highlighted the huge role to be played by investors in responding to the climate crisis and tackling other world problems like biodiversity loss and inequality. We have long believed that thinking about the impact of our investments is not only a way of addressing these issues: it is also a sound financial approach to maximise our clients’ returns.

As a business we take our own environmental, social and governance (ESG) commitments extremely seriously – and we hold all the investment managers that we work with to a similar standard. We want to see them acting to accelerate positive change. As a growing number of “green” funds are developed and promoted within the investment industry, we have to ensure that the companies we work with are not merely paying lip service to ESG principles – “greenwashing” – but are in fact fully embracing those principles in their action.

We check this through unique and rigorous analysis undertaken each year. The methodology underpinning our analysis continues to evolve in order to identify best practice in sustainable investment. Our latest findings are set out below.

Checking managers are living up to their claims – in practice

Each year we send a detailed questionnaire to the fund managers that we have selected to invest with on behalf of our clients. This list – currently 140 firms ؘ– comprises many of the best-known names in investment. We ask 50 questions across five themes, shown below, seeking insights into firms’ processes and priorities. Responses are analysed and scored, ultimately enabling us to grade firms across a spectrum from “leaders” to “laggards”. We can then focus our efforts on those managers which fall short.

Scorecard: how we assess investment managers

We ask 50 questions weighted in these categories

Because standards in sustainable investing are generally improving, and because we are adjusting our analysis to reveal the best in investors’ processes and outcomes, our criteria have tightened between our 2020 and 2021 surveys. Despite this, the overall trends are positive.

The charts below map firms’ weighted scores across each of the five categories by quintile (1 being the worst, 5 being the best), showing the change from last year. We saw overall improvements in firms’ performance in terms of credentials and engagement, even though our requirements are now higher. This demonstrates real progress. But the picture was different in the culture and voting categories. What was best practice in 2020 ceased to be best practice in 2021, yet fewer companies performed as well against those higher expectations. There was no change in capabilities, based on our analysis, so it is not shown.

Year-on-year progress
Our criteria are tighter, but trends are positive

Credentials: improving, even to a higher benchmark

Engagement: improving, even to a higher benchmark

Culture: poorer performance against higher benchmark

Voting: poorer performance against higher benchmark

Some improvement, but a greater focus on inclusion and diversity is needed

Honing in on the detail is revealing about firms’ behaviours in relation to individual issues. Within the "credentials" category, for example, we ask whether managers are signatories of the UNPRI (the six key principles of responsible investment supported by the United Nations). Between 2020 and 2021, the proportion of signatories has risen from 74% to 82%. This is on a name basis only: if we were to look at these numbers on the basis of assets under management, it would be approximately 96%.

Over 80% managers are now UNPRI signatories 

In relation to culture we ask questions about boardroom diversity, for example, where again we are seeing improvement. The proportion of fund managers where there are no women whatsoever on the board has fallen from 23% to 18%. There is still room for improvement: our analysis shows that a tiny minority of firms – under 5% – have a board comprising 50% or more women.

What is the proportion of women on your board?

We asked a new question for the first time in 2021, seeking insight into investment managers’ efforts to close gender and ethnic pay gaps. We found that 68% of managers do not disclose their gender pay gap, and the vast majority of this group do not intend to.

Ethnic pay gaps are even further from firms’ radars, with 94% failing to make disclosures.

Approximately 70% of managers still do not disclose their gender pay gap... with only 5% disclosing their ethnic pay gap

There is clear improvement in firms’ linking executive pay to ESG outcomes: the number of firms not doing this in any form is declining (from 55% to 46%). At the other end of the scale, the number of firms implementing this approach to remuneration at board level is small but rapidly increasing, rising from 16% in 2020 to 27% in 2021.

More managers are tying objectives and remuneration of senior management to ESG targets

Engagement activity with companies is improving, but we would like to see more evidence of escalation and voting action driving real change

Investment managers can make bold claims about their ESG capabilities and intentions, but the way in which they are staffed and the roles performed by those staff are more revealing. Our analysis interrogates those functions to provide an accurate picture of the extent to which ESG considerations are embedded in investors’ processes.

Very few firms (5%) now have no ESG resource at all. More than 90% have an ESG policy in place. But for ESG factors to be truly integrated, we expect to see investment analysts focusing on pertinent issues in their everyday research and company meetings. An optimal scenario would be where the analysts are overseen in this work by a central ESG team with dedicated resource. As shown in the chart below, our research shows this approach is now the most popular among firms and growing most rapidly.

More investment analysts are taking ownership of ESG responsibilities, with oversight from a central ESG team

Unsurprisingly this translates into an increase in meetings between investment analysts and companies where the agendas are ESG-specific. There are increases in other forms of engagement also.

Increasingly analysts are holding ESG-specific meetings, where discussing ESG is the main focus

Of those firms which perform ESG engagements, 80% have a follow-up process if targets are not reached.

When it comes to voting, a large and growing majority of firms have a policy in place (86% in 2021, up from 81%). And in a new question asked for the first time this year, we have a glimpse into how managers are using votes to push for change in the companies they own. We asked investment firms whether they were setting ESG targets for firms and what action they would take if these were not met. A majority said they would vote against the board in this scenario.

It’s about actual outcomes, not only processes

We questioned investment managers on wider issues to gauge their commitment to achieving ESG goals. As the charts below make clear, the picture was mixed.

In relation to net zero, there was clear progress. We found 33% of firms have already made a commitment to reach net zero, more than twice the proportion of 2020 (15%). And this was at the start of 2021, so it’s very likely that this number has increased closer to 50%, given that the Net Zero Asset Managers Initiative now comprises over 130 firms. There was a corresponding fall in the proportion of those yet to make a commitment.

But less encouragingly very few investment firms are tying the providers of their corporate debt facilities to any ESG targets. This is an area where we expect to see a greater evidence of commitment to ESG outcomes. Similarly, we are disappointed at the low proportion of managers with a clear policy to eliminate coal.

We also think there is room for improvement when it comes to voting on ESG-related shareholder resolutions. According to our findings only 46% of managers have adopted a “comply or explain” policy. Such a policy is considered best practice by the UNPRI, which argues that “voting in favour of shareholder resolutions should not be reserved for escalation following unsuccessful engagement, and should not be seen as a criticism of the board or management’s overall approach. Rather, voting should be part of an investor’s responsibility to provide clear and transparent feedback to the company, complementing and reinforcing messages that may have been shared through private engagement.”

Where managers do not vote in favour of an ESG shareholder resolution – for example because they think the wording is too stringent, or because the "ask" is too unrealistic and could erode shareholder value – we challenge them, notably questioning why they didn’t file their own resolution.

In our view, too few managers lead the charge on filing ESG shareholder resolutions, which is mainly done by purpose-led groups and NGOs. In fact, only 13% of our managers had filed an ESG resolution in 2020. We hope this figure grows significantly next year and beyond, as asset managers put forward more resolutions and further embrace their role as active owners.