The proliferation of sustainable investing products and the “greening” of the business of asset management is adding a new challenge for institutional investors—how to find and select the appropriate investment manager in a jungle made up of many shades of green.
Or worse: how to know when the sustainability claims on the part of the asset manager are credible or not just “greenwashing,” a term that has ensnared many of late, including one of the world’s largest, which recently agreed to fully divest from thermal coal, saying that the risk associated with climate change will lead to a significant reallocation of capital.
While risk and return are all that matters in traditional asset management, there’s more nuance in sustainable investing. That’s because “sustainability” means different things to different investors. Investors, the financial media, and the public are increasingly sensitive to the appearance of any mismatch between the public statements of an asset manager and their actions, such as how they vote their proxy on hot-button issues, from climate change to executive compensation.
As assets committed to sustainable strategies has been growing every year with no end in sight, there’s an immediate, pressing need to identify ways to measure whether those strategies are actually worthwhile.
So how can institutional investors judge whether an asset manager is a genuine sustainable-investing leader?
The first step is establishing a clear definition of sustainable investing. To us, at Allianz Global Investors, it means integrating environmental, social, and governance factors into investment decisions to better manage risk and potentially enhance long-term returns. In other words, sustainable investing is not only about doing good, but also about doing good business in a measurable way. It also means catering to the needs of a growing number of investors who want to deploy their capital in ways that can help address global challenges such as climate change or water scarcity.
That appetite to move the needle was evident in September when the United Nations established the Net-Zero Asset Owner Alliance. Its members represent nearly $4 trillion in assets and have committed to transition their portfolios to be carbon neutral by 2050.
Still, the rapid proliferation of sustainable offerings makes it difficult for investors to compare funds and managers and to ascertain which firms have made meaningful changes to their investment process. As the number of options increases, so too does the need for a way to properly differentiate one from another. Questions abound: Which ESG factors are likely to have the strongest impact on portfolio returns? Which, if any, are the most important? How are those factors measured and integrated into portfolios? Is proxy voting important? If so, when should an asset manager vote with or against a company’s management? These questions are driving institutional investment-consulting firms to review sustainability practices as part of their investment manager due-diligence process.
There are other resources investors can draw on. Four stand out.
First, is the investment manager a signatory to the United Nations-supported Principles for Responsible Investment? If they are, it’s also helpful to know how long they’ve been signatories.
More than 2,500 investment managers and asset owners have signed the pact, committing to incorporate ESG issues into their investment analysis and decisions and to actively incorporate ESG issues into their ownership policies and practices. Many have signed up only recently: The PRI pact was established in 2006, but more than 900 managers have signed since the start of 2018. It takes years for an entire organization to embrace sustainability principles. A willingness to sign on long before it became standard procedure is a decent indication of the depth of someone’s commitment.
Signatories must publish their activities and progress toward implementing the PRI principles. That’s typically undertaken in an annual sustainable-investing report that contains information such as how an asset manager engages with companies and voted its proxy.
Second is a measure of how often asset managers check in with their portfolio companies to help manage risk. A commitment to sustainable investing can also be seen in how an asset manager seeks to mitigate risks by engaging with portfolio companies. Are environmental, regulatory, and governance risks handled correctly? Investment stewardship is the combination of engaging with companies to push for change that can mitigate risk and proxy voting, when those requests do not result in the desired action.
Data on how many times an asset manager has engaged with those companies and on how many different topics can be used to measure their seriousness. Even better is knowing the outcomes of each of those engagements—and whether those outcomes are shared with investors—especially if they concerned specific changes to policy or requests to take action aimed at mitigating investment risk, improving corporate practices, or seeking greater disclosure of information.
It’s also important to know how often asset managers vote against management.
A report from Morningstar concluded that, “in practice many shareholders, including large institutional shareholders, reflexively follow management’s recommended vote” even on sensitive environmental and social resolutions. Managers committed to sustainable investing should build their own view and scrutinize on a case-by-case basis what will deliver the best long-term outcome for a firm, not just vote in lockstep. For example, a highly actively engaged manager might vote against at least one agenda item in 75% of meetings. (By comparison, passive managers may vote against management in only 10%.)
Finally, investors can consider an asset manager’s PRI Association rating, which ranks managers policies, objectives, and memberships of various organizations, and considers how the firm promotes sustainability internally and externally. Investors should look for A+ ratings.
Offering sustainable investing solutions is a serious commitment, one that demands putting significant resources into a dedicated sustainable-research team backed firmly by the asset manager’s leadership. It’s a commitment worth making, however, primarily because it can help mitigate risks that are still misunderstood by many investors, thereby offering the prospect to improve portfolio returns over the long run.
Beatrix Anton-Grönemeyer is chief sustainability officer at Allianz Global Investors.
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