November 29, 2022 | Stamford, CT — Institutional investors are planning to shake-up their asset manager lineups based on environmental, social and governance (ESG) standards.
Over the past five years, institutions around the world have increasingly adopted ESG approaches into their investment processes and portfolios. In Europe, ESG is virtually ubiquitous, with more than 90% of European institutions now employing ESG, and more than 80% planning to deepen ESG integration over the next three years. Since 2018, usage of ESG has roughly doubled in Asia and North America. Approximately three quarters of institutions in Asia now employ ESG standards, as do more than half of institutions in North America.
Rather than allocating assets to specific ESG funds, many of these institutions—including about 60% in both Europe and North America—have integrated ESG into the investment philosophy governing their entire portfolios, meaning that the increased focus on ESG will have implications for asset managers not only in in equities and fixed income, but across asset classes. For example, a significant percentage of institutions participating in a recent study from Coalition Greenwich are looking for opportunities to apply ESG in real assets and private markets.
As they integrate ESG, European institutions are overwhelmingly focusing on climate change and carbon emissions as their top ESG priorities. In North America, those environmental concerns are followed by diversity, equity and inclusion (DE&I) and in Asia, governance issues such as corporate transparency and business ethics follow climate.
Screening Managers Based on ESG
Around the world, these issues are playing a growing role in institutions’ assessment and selection of asset managers. Almost nine out of 10 European institutions consider ESG factors either very or somewhat important in manager selection, as do more than three quarters of Asian institutions and half of institutions in North America. In assessing ESG credentials, institutions are focusing on managers’ commitment to ESG and how well they communicate and provide evidence of their approach. Globally, only about 6% of institutional investors say that managers excel in communicating and evidencing their ESG approaches, indicating there is an opportunity for managers to step forward.
“Many of these institutions are evaluating managers’ ESG approaches during the early stages of their manager selection process,” says Mark Buckley, Global Head of Investment Management at Coalition Greenwich. “Managers who fall short on ESG could be eliminated from consideration early in the process.”
Institutions are applying similar levels of scrutiny to their existing asset managers. Among institutions that have adopted ESG, about half of Asian investors and 30% of North American investors expect to make ESG-driven manager changes on at least 10% of their assets in the next five years. In Europe, 60% of ESG users expect to shuffle manager lineups based on ESG , with 27% of them predicting that these changes could affect at least a quarter of their assets.
That shake-up will produce both winners and losers. To retain existing business and position themselves as leaders in ESG, asset managers should focus on how they are communicating and evidencing their ESG approaches to institutions.
“To be more effective, managers should put portfolio managers front and center in client communications, clearly articulate how they incorporate ESG in the investment process, and present concrete evidence on impact and investment outcomes, including extensive use of case studies,” says Mark Buckley.
Delivering on ESG: 2022 ESG Research – Selected Global Results: Coalition Greenwich conducted its fifth market study with institutional investors examining their preferences, perspectives, and future plans for employing ESG. Results are based on interviews with key investment decision makers at large institutional investors across North America, Europe, and Asia.