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Why G is dominating the ESG debate among asset managers

Russell Investments-led report indicates huge uptick in adoption but few, if any, companies tie ESG to performance criteria.

Why G is dominating the ESG debate among asset managers

LONDON - Governance far outstrips environmental and social factors for asset management companies evaluating ESG criteria.

However, less than one quarter of firms tie performance to ESG or climate factors.

According to a report led by Russell Investments, entitled ‘2020 annual ESG survey: turning up the volume’, which canvassed 400 asset managers globally, 82% of respondents said governance led their ESG-related decisions in 2020. A further 13% said environmental factors were most important, and 5% said social.

This figure was a slight reduction on the 2019 figure, where 86% said governance, 9% said environmental and 5% said social. Similarly, the 2018 report had governance at 91% against 5% for environmental and 4% for social.

What matters most

In the overview for the report, Russell said it was not surprised by the outcome given that company management has been a critical component in long-term enterprise value.

‘Materiality of ESG elements differs by industries. For instance, environmental aspects might be more material to the industrial sectors like energy. Social elements like human capital management and data securities might be more material to technology or finance sectors than other industries. But the overall corporate governance applies to all companies, regardless of industries.’

However, it noticed the increasing prominence of the E and S aspects as a sign that these factors had become more important during the Covid-19 pandemic. This is because companies were forced to address both their internal (jobs and human capital) and external (production and development) impact.

Continental Europe was found to be the market with the greatest emphasis on environmental factors, with almost a quarter of respondents putting it as their highest priority in 2020.

Accountability

One element that stood out from the report was a question as to whether asset managers tie their performance to set ESG or climate-related criteria. Here, 71% said they do not, while a fifth said there is an expectation for both portfolio managers and analysts to meet certain criteria.

‘This further shows that ESG profile accountability is weak among key investment professionals, suggesting that ESG impacts alone have less weight to investment performance outcome than the hype of ESG integration suggest,’ Russell said.

Engagement was found to be partially driven by an asset management firm’s size. Almost all of the companies with more than $100bn in assets were always or regularly involved in ESG discussions with senior management, while only three-quarters of firms with assets below $10bn were involved. This is while the number of equity-focused asset managers voting against company proposals has risen by 10% between the 2019 and 2020 reports.

In terms of products with an overt ESG emphasis, the report found that the number of companies with more than $20bn in ESG-related strategies had risen from 18% in 2019 to 28% in the 2020 report. Anecdotal evidence showed that ESG integration-focused funds were proving the most popular among clients.

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