australiaen
ESG integration: how to monitor your external manager?

ESG integration: how to monitor your external manager?

28-11-2014 | Insight

While ESG integration seems high on the agenda of many asset owners, implementation remains a challenge when selecting and monitoring external managers. Cécile Churet, Sustainability Investing Client Specialist at RobecoSAM, researched the industry trends and concluded that there is still a long way to go.

Preference for ESG integration

When asked which sustainability investing approach asset owners want their external asset managers to apply, 70% indicated ‘ESG integration’, compared with 50% for screening and 25% for thematic approaches. However, this preference implies two challenges, i.e. identifying asset managers that truly integrate ESG into their investment decisions, and ensuring these aspects are incorporated in mainstream asset manager searches - and are actually implemented as intended. Churet found that while a fair amount is being done at the manager selection stage, less is done in terms of monitoring and ongoing dialogue with asset managers once they are selected.

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates
Subscribe

Formalization in mandates is lacking

A major challenge appears to be the appointment stage, as few SI-related aspects investigated at the selection stage are translated into formal contractual agreements. Only 6% of asset owners include reporting on portfolios’ SI characteristics in the contract clauses with their asset managers. Feedback from asset owners has been that part of the challenge of formalizing these requirements into legally binding agreements comes from legal advisers who are not convinced about ESG integration.

Is ESG integration truly evaluated?

Similarly, less than 40% use a sustainable investment criterion as a formal component of manager performance evaluation. Two-thirds of asset owners assess managers’ ESG incorporation strategies, but less than half actually assess the quality and coverage of the ESG research used by the asset managers, or meet with their investment staff to review their SI competences.

As asset managers become more sophisticated and consider ESG issues as part of their fundamental analysis, using different sources of data and feeding them into their valuation models and investment decisions, it will become more difficult to isolate the ESG component of the investment process.

A long way to go

In conclusion, while ESG integration seems high on the agenda of PRI signatories, implementation remains a challenge. What’s more, these findings represent the practices of the most committed and most advanced asset owners. For much of the pension fund industry, there is still a long way to go on sustainable investment. Similar findings were observed across the whole PRI signatories’ base.

Subjects related to this article are:
Logo

Disclaimer

BY CLICKING ON “I AGREE”, I DECLARE I AM A WHOLESALE CLIENT AS DEFINED IN THE CORPORATIONS ACT 2001.

What is a Wholesale Client?
A person or entity is a “wholesale client” if they satisfy the requirements of section 761G of the Corporations Act.
This commonly includes a person or entity:

  • who holds an Australian Financial Services License
  • who has or controls at least $10 million (and may include funds held by an associate or under a trust that the person manages)
  • that is a body regulated by APRA other than a trustee of:
    (i) a superannuation fund;
    (ii) an approved deposit fund;
    (iii) a pooled superannuation trust; or
    (iv) a public sector superannuation scheme.
    within the meaning of the Superannuation Industry (Supervision) Act 1993
  • that is a body registered under the Financial Corporations Act 1974.
  • that is a trustee of:
    (i) a superannuation fund; or
    (ii) an approved deposit fund; or
    (iii) a pooled superannuation trust; or
    (iv) a public sector superannuation scheme
    within the meaning of the Superannuation Industry (Supervision) Act 1993 and the fund, trust or scheme has net assets of at least $10 million.
  • that is a listed entity or a related body corporate of a listed entity
  • that is an exempt public authority
  • that is a body corporate, or an unincorporated body, that:
    (i) carries on a business of investment in financial products, interests in land or other investments; and
    (ii) for those purposes, invests funds received (directly or indirectly) following an offer or invitation to the public, within the meaning of section 82 of the Corporations Act 2001, the terms of which provided for the funds subscribed to be invested for those purposes.
  • that is a foreign entity which, if established or incorporated in Australia, would be covered by one of the preceding paragraphs.
I Disagree