ESG adoption policies vary sizably across regions, time & AUM
LONDON, September 20, 2018 — Global asset manager Russell Investments has released findings from a survey of 299 equity and fixed income investment managers globally that shows wide gaps in the adoption of environmental, social and governance (ESG) policies by region, time and assets under management (AUM.) The survey, conducted by the firm's manager-research team, provides them with a deeper understanding of the ways investment managers consider ESG factors, which has become an increasingly important consideration in their intensive review process.
The survey found firms based in the United States, Canada and Asia (excluding Japan) lag significantly behind peers from other regions, even when factoring in firms that intend to develop a responsible investment policy over the next 12 months. This trend also aligns with the timeline by which the respective countries signed up to the United Nations-supported Principles for Responsible Investment (PRI). Over 50% of respondents in the U.S. and Canada only became PRI signatories after 2015. Meanwhile, of all respondents, the majority in Japan, Australia, New Zealand, the United Kingdom and continental Europe became PRI signatories prior to 2015.
"There is a clear relationship between the date of a firm's pledge and the extent to which they have implemented responsible investment policies," said Puneet Thiara, research manager at Russell Investments. "This suggests to us that being a PRI signatory is now more of a hygiene factor, rather than a clear indication of actual ESG integration."
The survey also found adoption positively correlates with AUM, which means the prevalence of PRI signatories and responsible investment policies increases with the size of a firm's AUM. The percentage of firms that are PRI signatories with responsible investment policies is twice as high in firms with an AUM greater than $500 billion (versus firms with an AUM less than $10 billion). This is likely due to larger firms having the resources—and perhaps the financial incentive—to fulfill the responsibilities required to be a PRI signatory and to have detailed responsible investment policies.
Regarding the number of dedicated ESG investment professionals at a firm, the survey found only 36% of firms have dedicated ESG professionals who spend at least 90% of their time on ESG-specific matters. On a regional scale, firms domiciled in the U.S., Canada and Asia (ex-Japan) have the lowest percentage of firms with dedicated ESG professionals versus all surveyed regions. AUM appears to be a very strong factor in this finding as 92% of firms with AUM greater than $500 billion have dedicated ESG professionals. Conversely, 91% of firms with AUM less than $10 billion do not have dedicated ESG professionals.
"This inverse relationship is mostly due to the fact that small, boutique asset management firms have more limitations than larger asset managers in the number of investment professionals they can hire and what they focus on," Thiara said.
Client demand, superior risk-adjusted returns & governance
The survey found that the primary motivation for 35% of firms to initially integrate ESG into their investment process was business-related and client demand. Meanwhile, 28% of firms were motivated by a belief in superior risk-adjusted returns.
When asked about their current primary motivation for maintaining ESG integration, the number of firms motivated by superior risk-adjusted returns increased to 32%, while business-related reasons and client demand slightly decreased slightly to 33%. Although these shifts are small, they suggest that ESG integration is becoming slightly less business-driven and more investment-driven.
Regarding the individual ESG factor that has the greatest impact on investment decisions, 91% of firms cited governance. However, 35% claim ESG considerations dominate investment decisions only when they increase security-specific risk. Meanwhile, only 16% claim they are dominant only when they drive positive security returns. Interestingly, 49% of firms do not allow ESG considerations to dominate investment decisions regardless of their potential to increase security-specific risk or generate positive security returns.
More findings from the survey and analysis are available here, including a look at the use of quantitative ESG data in a firm's investment process, including whether firm's conduct proprietary ESG capital market research to support their ESG integration efforts. Capital market research efforts decrease as firmwide levels of AUM decrease.
About Russell Investments
With more than 80 years of experience, Russell Investments is a global investment manager, dedicated to helping investors reach their long-term goals. Russell Investments offers investment solutions in 31 countries, manages £219 billion in assets (as of June 30, 2018) and provides consulting services on US$2.3 trillion in assets (as of Dec. 31, 2017). Russell Investments specializes in multi-asset solutions, scouring the globe to deliver the best investment strategies, managers and asset classes to its clients around the world.
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