ESG issues are key this year

We recently conducted a survey of fund managers to canvass their views and opinions on environmental, social and governance issues because these factors are playing an increasingly prominent and integral role in our multi-manager investment process.

This reflects both the fact that as a company we are a signatory to the United Nations-backed Principles for Responsible Investment (Unpri) and our belief that these factors do have an impact on investment performance.

The initiation of the survey was prompted by the mere mention of the term ESG in our frequent manager meetings appearing to flummox many individual portfolio managers. We have frequently found that robust high level corporate wide ESG policies do not necessarily percolate down to the processes of individual managers and investment teams, but the findings suggest that this is certain to change.

According to 31 global fund management houses with combined assets under management of roughly £4trn, the majority considers ESG to be relevant to their broader business. The key reasons for this are client or consultant demand, reputational risk management, impact on long-term price performance and regulatory changes.

Sixty eight per cent of respondents believed there to be a link between ESG performance and total returns.

While empirical research in support of this is thin on the ground, the list of potentially material factors put forward by respondents include the alignment of management and shareholders, reputational protection and revenue opportunities.

Our team has adopted an ESG screening tool enabling us to drill down into individual holdings and understand fully some of the ESG related risks and opportunities. Of those who responded to the survey, 43 per cent have a dedicated ESG/SRI resource and 55 per cent subscribe to an ESG information provider.

Eighty four per cent of respondents also stated that managers and analysts consider ESG factors as part of their processes. Generally the governance part of ESG tends to receive the most attention and it is not surprising to note that the same number of respondents vote actively and have a voting policy in place.

We view public disclosure of voting as best practice and are encouraged to see that more than 50 per cent of respondents publicly disclose how they have voted.

Perhaps most significantly, no less than 90 per cent of respondents believed that ESG issues are important for clients. It does not seem like a huge leap to assume that if this is representative of the feedback asset managers are getting from their clients we are likely to see ESG factors playing a larger role in the mainstream going forward.

Furthermore, 74 per cent of respondents expect ESG factors to be incorporated in all mainstream funds in the future. Even if the results of the survey are reflective of the more proactive asset managers in this area the shift of ESG from the periphery to the mainstream appears to be well underway.

We believe these issues to have the potential to be material in nature and they could play a more central role in mainstream investment analysis this year.