Fund houses under ESG spotlight

Asset managers need to practice what they preach in implementing and integrating sustainable investment policies, according to Aviva Investors.

Asset management firms need to implement coherent and consistent processes and approaches to ESG amid increasing “noise” in this segment of the investment industry.

“Clients are increasingly asking for asset managers to walk the talk and they are asking asset managers to disclose what they are doing in the ESG space,” said Marte Borhaug, global head of sustainable outcomes at Aviva Investors.

The starting point is leadership and commitment, with investors looking to assess a firm’s ESG agenda and how genuinely engaged its senior management is.

“This can be reflected in the centrality of ESG to corporate strategy, how it impacts fundamental market views, and shapes the development and delivery of products and solutions for clients,” explained Mirza Baig, global head of governance and stewardship at Aviva Investors.

Part of this relates to understanding the extent to which a firm’s stewardship policy cascades across asset classes – not just in equities, but areas such as corporate credit, sovereign debt and real estate.

Asset managers also need to help drive market reforms, by working with all market participants to change the playing field in which investments operate, not just the investments themselves, added Borhaug.

This includes a combination of sustainable policy and regulation, improved data and multi-stakeholder coalitions.

ESG in high demand

There is no doubt about investor support for those firms which get it right. ESG flows have continued to increase rapidly quarter-on-quarter across the globe.

They even picked up pace in early 2021, with a record net inflow of $185bn into sustainable funds in the first quarter, according to Morningstar data. As a result, global assets in sustainable funds were nearly at $2trn by the end of March.

Asia has been a hotbed of activity, albeit from a relatively low base. The region has seen assets in sustainable funds quadruple since the start of 2018, with $7.9bn in net inflows in 2020 compared with $810m in 2019.

This follows the surge in ESG products coming to market; Morningstar research showed 43 new funds launched in Asia in 2020 versus 27 during the previous year.

Staying true to label

To ensure this trajectory of inflows and fund launches continues, asset managers need to consider key elements at the product level in addition to their organisation-level commitment to ESG.

For example, funds will only really benefit from stewardship activities if the outcome of engagement flows through to investment decisions and portfolios.

“If that feedback loop is not happening in a systematic way, then the engagement really is just ring fenced, rather than baked into the core investment process of the funds,” explained Baig. “And this means that your engagement will be less impactful, because you are not really linking capital to your asks.”

The outcome will also be impacted as it will deprive the funds of what he calls “the inflammation advantages” from engagement that could have been used to enhance investment returns.

There are also various weaknesses with an exclusionary approach, added Borhaug. First, she believes it can be hard to determine what is actually “good and bad” – a company can be involved in renewable energy yet could also have a human rights breach.

A second issue relates to hidden risks. “The data we use simply does not allow for nuance and quality analysis,” she said. “There are plenty of examples in history where there are companies that have a really good ESG score and all of a sudden, there is a scandal.”