ESG, and particularly the E, has come to the forefront of public discussion over the last year or so and is starting to become much more of a discussion-point in client meetings around the industry.
We are all very aware of the issues of climate change in day-to-day life. But it is quite difficult when you go to work and you sit in front of a screen looking at a model that you have used every day for the last couple of years to then think how do ESG issues play out in your day-to-day decision making.
We do think that there is a place for ESG in all of the advice that we give to our clients across the whole of the investment journey. From setting objectives through to setting strategies, manager selection and all that comes with implementation and ultimately in the way that we monitor and report back to clients, they can check that they are still on track for their objectives.
We are researching across asset classes from liquid to illiquid, public to private, equity and fixed income. Across this area we have 52 different asset classes where we research managers and there are 130 preferred managers who have our top rating.
"We do think that there is a place for ESG across the whole of the
investment journey."
For this entire asset class, we will be asking questions about ESG and rating managers on how they integrate ESG into their investment process.
For some of my manager research colleagues it is a slightly tougher job than for others. This is because for some, the ESG rating will sit with the researcher who covers each asset class and it doesn’t sit with me as Head of Responsible Investment.
So if you are a US high yield debt researcher then they will hold a view within that peer group as to who the best manager is in terms of integrating ESG.
There are four main areas that we ask questions about when we are going through the manager research process. The first area is the investment process and what we want to understand is how the asset manager comes up with ideas and how they ultimately decide what to invest in.
As you are aware the ESG conversation is much better understood in the equity area as there is a much longer track record of talking about ESG in equity, but we feel very strongly that ESG factors are equally important when making investment decisions in fixed income as well.
In some cases, we feel that the focus on downside risk and the capped upside means that fixed income is really appropriate for talking about ESG.
"The ESG conversation is much better understood in the equity area."
In terms of data, due to the heritage, the ESG data is often at an issuer level and one of the things that we really want to understand when we are talking about investment process is how does a fixed income team absorb their ESG and third party information that is available to them.
There are multiple different risk profiles in fixed income, so how do you translate that issuer view into a particular security. Clearly there are also different levels of analysis in terms of both at the country-level as well as the individual company.
The second area is around stewardship and this is becoming a particularly important topic.
To be honest, investment consultants haven’t been as good as we could be in talking with clients and asset managers about what engagement means in fixed income asset classes.
Fixed income asset managers haven’t been as great either as they could have been about articulating that, but I do feel that this will be a big discussion going forwards.
"Investment consultants haven’t been as good as we could at talking with asset
managers about what engagement means."
The third factor that we look at is infrastructure and reporting. We are really trying to understand what supports the investment process and stewardship in terms of the infrastructure within an asset management firm.
If we walk the floor or sit with a portfolio manager at the desk, we are going to be looking through the portfolio, seeing what they see. And when we are talking through an investment decision we will be looking at the financial information that portfolio manager has in front of them.
Alongside the traditional information we are looking to see whether the ESG rating or data they have is also there or does the portfolio manager have to log off their screen and find the database, log into it and search around in order to come up with ESG information.
Or, even worse, do they have to stand up and walk across the room and up the stairs to the 12th floor in order to ask someone else about it. We want to see whether it is integrated into the infrastructure.
What backs this up is that if you have great infrastructure you should be able to give us as the consultant reporting which we can then also give our clients. This helps to bring to life how the investment process is playing out over time and how ESG is being implemented.
"We are really trying to understand what supports the investment process and
stewardship in terms of the infrastructure within an asset management firm."
The final area is accountability and this is the soft stuff. We will have gone in and heard about the process, engagement and have seen the infrastructure and reporting capabilities.
But at this point we are trying to work out whether the culture of the firm supports an investment philosophy that integrates ESG. There is both bottom-up and top-down in here as it is fantastic to have CEOs with a very strong message about the importance of sustainability and sustainable businesses, but we want to test whether this message is getting through in the way that an analyst behaves or portfolio takes decisions.
There has been a lot of press about the number of ESG analysts being recruited to bolster the ESG research going on at asset management firms.
But we really want to know that those new recruits, who are doing fantastic work are sharing their research with others in their company who also feel that the research is relevant and were able to apply it to their own situations.
Here, we are trying to understand how the ESG team gets their work through so that if there is a portfolio manager who doesn’t listen when an ESG analyst comes over and talks to them, what is the recourse and what is the reporting line of the ESG team.
One important factor that we also like to talk about at this point is remuneration. When there is any link between ESG and remuneration within portfolios, this is often a useful and clarifying discussion to have.
