By A Paris – Institutional asset managers are on a journey to improve the impact their own business has on the world. As investor demands related to the impact of their investments increases, managers focused on providing robust impact information to clients are themselves becoming more introspective and making efforts to strengthen their own operations in terms of these factors as well.
In a world where seven out of ten institutional investors would refuse a private equity or co-investment opportunity on ESG grounds, according to a report by PwC, asset managers are increasingly under scrutiny. The growing demands from impact investors mean companies are being driven to “identify new business models to ensure a more positive impact on key environmental and social conditions and set themselves ambitious financial and social targets” say Marc Pfitzer, Mark Kramer, Helge Mahne of consultancy FSG.
Kurt B. Harrison, Co-head of the Sustainability Practice at Russell Reynolds Associates outlines: “ESG is forcing a fundamental rethink in corporate strategy. ESG will eventually have the same effect as prior ‘transformations’ which resulted in financial services firms reinventing themselves as ‘tech companies’ and later measuring and reporting how diverse and inclusive their work environments had become.”
Asset managers are responding to this not only by building parameters and frameworks for the way they invest, but also making changes to the way their business operates on a more macro level.
“We’re very conscious of the fact that as responsible investors, we are telling companies they should disclose their own energy usage, should avoid business travel where possible and reduce their impact on the environment. In view of that, we can’t be hypocritical and not practice what we preach,” points out Eoin Fahy, Head of Responsible Investing, KBI Global Investors.
Across the industry, there has been much focus on embedding ESG and positive impact practices within investment strategies. However, as yet, less has been said about how asset management firms themselves stack up against the high criteria they demand of their portfolio companies.
Stephanie Mooij Senior Engagement Associate at Aegon Asset Management explains how the firm has been making efforts to improve itself in ESG terms. Discussing how Aegon is faring overall, she says: “We’re doing well but we still have some way to go – it’s a journey and no company is perfect. We’ve done well in identifying where we need to improve and we’re working on those areas. It’s also rewarding to see this improvement recognised by external organisations, such as the UNPRI where we scored in the top 29% of asset manager signatories last year.”
Climate change has been the topic on everyone’s lips – always ticking away in the background, having been brought to the global stage by activists like Greta Thunberg. Although as investors, asset managers can contribute to making improvements, one does not immediately consider these companies in terms of their own impact in this regard.
Nomura is one firm which has received accolades for its efforts in tackling climate change. In December 2020, the firm was listed on the CDP 2020 Climate Change A List. The is a list compiled by the international not-for-profit organisation which encourages corporate disclosure on environmental initiatives. “Nomura is actively engaged in ESG and SDG activities as part of its efforts to ‘Drive Sustainability.’ Nomura’s selection to the CDP’s A List recognises such initiatives and the firm’s proactive approach to information disclosure,” the firm said in the announcement.
Fahy at KBI also highlights the firm’s efforts in relation to climate change: “We have clients all over the world and, when not in a pandemic, we spend a lot of time in the air. To mitigate this, we run a programme to offset carbon emissions and for the last two years successfully offset all our carbon emissions from business travel. We did this by planting a woodland forest of native species in Ireland.”
Although other large global managers like Nordea, Legal and General Investment Management, BNP Paribas Asset Management, Aviva Investors and Robeco have been leading the charge when it comes to climate change discourse, there is still a long way to go.
A study by ShareAction found that although 61 percent of the world’s largest 75 asset managers reference climate change in their investment policies, only 21 percent have a dedicated policy. Alarmingly, 39 percent of surveyed managers, with over USD22 trillion in assets under management, still make no reference of climate change in their public investment policies.
Regulation is often considered to be a burden and in truth, is not regularly welcomed with open arms. In the case of ESG, sustainability and impact however, many industry players agree regulation is critical.
Emanuele Fanelli, Head of ESG – Fixed Income & Partnership, Aegon Asset Management, comments: “The new regulation in Europe is going to be a game changer. It promises to be a massive lever of change if used correctly. This is important since till now, the majority of the asset manager push on ESG has been driven by clients and external stakeholders.”
In June 2020, the EU published its sustainable finance taxonomy regulation, which came into force in July of the same year. This was done in efforts to meet the EU’s climate and energy targets for 2030 and reach the objectives of the European Green Deal. The new regulation establishes the framework for the EU taxonomy by setting out four overarching conditions that an economic activity has to meet in order to qualify as environmentally sustainable. The regulation also sets out six environmental objectives.
This new piece of legislation will be the first step towards obtaining a basic standard of engagement and reporting on impact. Fahy at KBI says: “The lack of standards when it comes to impact reporting may be solved to a degree by this EU regulation. There is a long way to go in order to get there however. Even when all six objectives are developed and brought into force there are still many elements of impact which won’t be captured by the taxonomy.”