• Wietske Blees

Integrating ESG critical to winning mandates

​Factoring environmental, social and governance (ESG) requirements into investment processes increasingly seen as a precondition to winning investment mandates, the 5th Asset Manager Summit has heard.

​Pablo Berutti, head of responsible investment APAC at Colonial First State Global Asset Management said that over the course of the past decade, institutional investors and their members have become noticeably more concerned with responsible investment.

“When I first started in this space, we may have seen one or two [requests for proposals]…that would ask questions around responsible investment. Now every single one of them does,” Berutti said.

Berrutti said that while the sophistication of those questions remains varied, there is no denying that the level of understanding on the part of institutional investors and the pressure they are putting on their asset managers is increasing.

“The sophistication of the questions is quite variable. In a lot of cases it is still: “Are you a signatory to the Principles for Responsible Investment (PRI)? Tick. Do you have a policy? Tick,” but the more advanced asset owners on this journey are asking much deeper questions around approach to human rights risk, approach to climate change risk, how do you deal with corporate governance, so we have seen that evolve significantly,” Berutti said.

What we are finding after developing our ratings scheme is that managers with a stronger capability in responsible investment are much more likely to meet the investment objectives of their mandate.

Liza McDonald, head of responsible investments at First State Super said that among the key criteria that First State Super looks for in asset managers is a solid process around ESG.

“We look at things like policy, ESG integration into the process, transparency, alignment and active ownership – stewardship - and how those managers approach all of those criteria. We certainly don’t screen anyone out who isn’t a PRI signatory.

​We have seen many managers who can articulate how they integrate ESG into their process, even though they aren’t PRI signatories – [but] it is about really understanding how the managers look at the material ESG issues and risk in their investment process,” McDonald said.

Bill Hartnett, head of responsible investment at Local Government Super, said that LGS has become significantly more detailed in its evaluation of asset managers with respect to commitment to responsible investing.

He said asking for case studies is a good way to gain further insights into decision-making processes. “What was the decision-making process for why you invested in that company, why you might have got out of that company, why you might have voted on that company, or your engagement results? That gives us good insights into the portfolio and decision-making process,” Hartnett said.

LGS has also developed a rating scheme to add further colour to its investment allocation process. “What we are finding after developing our ratings scheme is that managers with a stronger capability in responsible investment are much more likely to meet the investment objectives of their mandate … Looking at their processes, these managers are just understanding companies and doing their research better. [That’s resulting in] better returns, so there is a natural attrition and a much stronger conviction from our fund to go with managers with stronger RI capabilities in each of the strategies that we want,” Hartnett said.

McDonald said that it is in part incumbent on asset owners to guide investment managers in terms of ESG expectations. That also means that where asset managers fall short of ESG expectations, First State Super is open to working with managers to improve those processes. “If the preferred investment manager that our portfolio managers may be looking at is a lower rated manager based on what has come out from our review, I think it is incumbent on us to bring them up to what we expect… It is all about integration and mainstreaming, so the more of our managers we can get to think about this I think the better our portfolio will be,” McDonald said.

However, while the market is becoming more sophisticated, there are still red flags, particularly when policies don’t match actual behaviour. “What we see in Australia is a series of Royal Commissions in banking, and announced for aged care. These are demonstrating conduct issues that just haven’t been really all that great. This misconduct clearly has negative social impacts. Furthermore they hurt our returns as asset owners. So when fund managers say that “they been integrating ESG factors forever and a day” … those are the sort of things that start to be a red flag for us, particularly when you look at it against their portfolio holdings and voting records,” Hartnett said.