As demand for sustainable and impact investing from both institutional and retail investors has grown, more money managers are incorporating environmental, social and governance investment strategies and offering ESG-oriented products.
The money managers that consider ESG factors in their investment practices accounted for $8.10 trillion in assets under management in 2016, an increase of 68% since 2014.
Yet, according to the US SIF Foundation, questions have been raised about the quality and transparency of ESG and sustainable, responsible and impact investment (SRI) practices among some money managers.
“Some of the newer entrants claim to consider ESG factors across all assets, but do not disclose much information on their ESG incorporation process or the ESG criteria they consider,” according to the US SIF Foundation, which is an organization dedicated to the advancement of SRI investing across all asset classes. “Many industry professionals question whether this lack of information and potential ‘green washing’ will turn investors away.”
The US SIF Foundation released a comprehensive guide for money managers on how to incorporate sustainable, responsible and impact investing at their firms.
The Money Manager Roadmap, as the guide is called, provides six steps asset managers can take to develop and enhance sustainable investing strategies.
“As the field expands, we consistently hear that asset managers need basic information about how to get started in creating ESG-focused products and strategies. We also believe that asset managers need to continually build out their offerings and provide transparency about their investing process,” said Lisa Woll, CEO of the US SIF Foundation.
The Roadmap was designed with input from leading portfolio managers at US SIF member firms and covers the following steps, from introductory to advanced, for money managers to develop sustainable investment programs and products:
Here are the six steps:
1. Establish board and senior level oversight.
For asset managers and their firms to “meaningfully” explore the process of addressing ESG issues in their investment offerings, their board of directors or board of trustees — as well as senior level staff — should be involved from the beginning, according to the US SIF Foundation.
The guide also suggests appointing an internal “champion” who is interested in sustainable investing or establishing a special committee.
“The champion or special committee can set the agenda and determine goals on ESG exploration and activity for regularly scheduled board meetings,” the guide states.
The actual implementation then may be assigned to the investment or risk teams, according to the guide.
2. Identify sources of ESG data, research and training.
The guide notes that there are a variety of ESG data sources available for money managers.
These include third-party data providers such as Bloomberg and Morningstar, and specialty ESG research firms such as MSCI ESG Research, Sustainalytics and Vigeo EIRIS, among others.
According to the guide, the advantages of using third-party data and research providers are that they cover large universes of data, identify important ESG factors, and provide comparable corporate data on these factors, all of which generates economies of scale.
In addition to using external data sources, some money managers choose to develop in-house ESG research expertise, according to the US SIF Foundation. Other ESG data sources include government or agency data, direct company engagement, and sell-side research.
3. Develop and implement an ESG incorporation strategy.
A key question for firms – from a business strategy perspective – is how much emphasis to place on firm-wide ESG integration versus impact or sustainability-themed strategies.
“Some firms start by implementing some level of ESG integration and later leverage their ESG expertise to develop sustainability-themed strategies, impact investing, positive/best-in-class screening and negative screening,” the guide states.
Other firms stop at ESG integration. Yet others start by developing sustainability-themed strategies and may later adopt a broader ESG integration approach across the rest of their assets.
According to the US SIF Foundation, the strategy of ESG integration, defined as the systematic and explicit inclusion by investment managers of ESG factors into financial analysis, has seen rapid growth since 2012.
Based on responses to US SIF Foundation’s biennial trends surveys and information from PRI Transparency Reports, ESG integration is being applied across trillions of assets under management.
4. Develop and implement an investor engagement strategy.
Some firms may want to take the additional step of directly engaging with the companies in which they invest.
According to the guide, money managers, as well as institutional investors and other stakeholders, can use engagement strategies to bring critical ESG issues to the attention of company senior management and other stakeholders and to drive positive change in corporate policies and performance.
Moreover, the guide suggests that engagement on ESG issues can be a differentiator that helps money managers attract and serve clients.
Engagement also can occur with privately held companies, and sometimes bondholders also engage companies because they are lending capital to them, the guide notes.
5. Measure and manage impact.
A key motivation for sustainable and responsible investors is making a positive impact, which is why the US SIF Foundation suggests asset managers report on the impact of investments as a way to demonstrate the positive work firms are accomplishing.
“Important steps for measuring the impact of an investment include establishing impact targets, determining the relevant metrics to use, collecting data, assessing the data to measure impact and reporting on results,” the guide states.
According to survey findings from a 2017 Global Impact Investing Network report, the most common types of impact measured are environmental and social outputs, environmental and social outcomes, and breadth of impact.
6. Participate in building the field.
The US SIF Foundation suggests asset managers consider joining industry associations to stay abreast of important developments in ESG and SRI.
The guide notes that these associations organize major conferences and events, which are a way to showcase a firm’s work and to learn about developments in the broader field.
Another valuable contribution that asset managers and firms can make is reporting on the firm’s sustainable and impact investing activity.
In turn, the US SIF Foundation says that the firms that do this will benefit from visibility with potential investors and other potential partners in the field.
—Related on ThinkAdvisor: