ESG a total-portfolio subject: bfinance

ESG is increasingly becoming a "total portfolio" subject, with investors seeking an approach to material ESG issues in a way that encompasses all asset classes, according to a new study from bfinance.

The global study includes 26 Australian respondents and tracks key change in implementation practices as well as challenges.

bfinance has identified three themes - in addition to investors seeking to address ESG issues at a total portfolio level, 'impact' is rising up the agenda as those in the investor sector move towards thinking about ESG in terms of outcomes. Third, data is a significant obstacle, with 84% of investors saying that the lack of consistent, standardised ESG information across all asset classes and asset managers represents a challenge.

"ESG is clearly a focus for Australian investors with 96% of Australian respondents agreeing that ESG consideration are of high or moderate importance to their investment strategy," said Daniele Goldberg, director of client consulting for bfinance in Australia. "There's long been a concern that the focus on ESG would be impacted by a market downturn. But the recent pandemic has shown this to be the opposite. In Australia, Covid-19 has clearly accelerated the focus on ESG with over 45% of Australian investors saying the pandemic has affected their investment team's focus on ESG issues."

The study found that COVID-19 has driven ESG higher a as a priority over the last year. One in three investors say that the pandemic has "actually resulted in greater attention for ESG matters at their institution, particularly in relation to social and corporate governance matters including diversity," bfinance said. Nearly half - 46% - of asset owners globally say that ESG considerations are now of "high importance" to their investment approach while 39% say they're of "moderate importance."

Thirty percent of US respondents said that ESG issues are of "minor" or "no" importance. This compares with 4% of Australian respondents that say ESG issues are of "minor" or "no" importance.

Measuring carbon emissions and assessing 'impact' in areas beyond carbon emissions have become issues of importance globally - 46% of global investors now assess the carbon emissions associated with their overall portfolio, up from 13% three years ago, with a further third "actively considering" this step. Plus, 28% now map the portfolio against the UN Sustainable Development Goals, up from 3% three years ago, including 36% of pension funds while a further 38% are "actively considering" this point.

The question of transparent, consistent data is the major challenge for investors - 84% of investors are experiencing challenges in obtaining consistent ESG reporting across asset managers and classes, with 55% calling this a "major challenge." Investors are also finding difficulties in validating the investment case for ESG or impact investing and more than 50% experience difficulties in finding external asset managers that align well with their ESG approach.

"The results show the increasing breadth, depth and complexity of ESG implementation as investors look to take a more consistent, portfolio-wide, data-grounded and in many cases impact-minded approach," said Kathryn Saklatvala, head of investment content for bfinance, "Yet the advancement also brings challenges: investors with increasingly clear objectives and priorities in this space are even more frustrated by the lack of clear, consistent, standardised data on many of the key issues."

bfinance also found that the majority of investors integrate material factors into asset classes that were previously not considered mainstream, including 67% of private debt portfolios, 55% of emerging market debt portfolios and 76% of private equity portfolios.

Survey responses show asset owners are using an increasingly broad mix of approaches including ESG integration, negative screening, active engagement via asset managers, active engagement directly with investee companies, impact investing and thematic investing and more. T

here has been substantial growth in the prevalence of all of these practices within specific asset classes over the last three years as well - in fixed income, for example, ESG Integration has risen from 29% three years ago to 64% while negative screening has risen from 29% to 53%. Impact investment and thematic investment are still used by a minority of investors in each asset class, but their popularity has risen dramatically in the last three years: 35% of real assets investors now do thematic ESG investing, up from 15% three years ago, with a further 20% "actively considering" doing so.

Investors have widely differing beliefs about the connection between ESG and performance, with 82% expecting ESG equities to outperform over the next three years (35% "strongly agree") versus 70% (17%) expecting the same in bonds. These expectations become substantially firmer over a 20-year horizon.

More than 90% of investors say that ESG criteria is important to them when selecting external asset managers (60% "strongly agree"), while 42% have fired at least one asset manager where ESG matters were a contributing factor to that termination (19% "the primary/major factor").

Investors also demanding more from their service providers, with 76% saying they have "stricter" ESG criteria for manager selection than they did three years ago.

Although asset owner respondents emphasise that manager ESG assessment should not be a "box-ticking exercise", an increasingly large proportion say they are "unlikely" to hire managers with certain ESG characteristics, such as not being a signatory of PRI (63% "unlikely to hire" in equities, 43% in real assets), not having a dedicated ESG headcount (43% in fixed income), or lacking gender/ethnic diversity (31% of investors in hedge funds "unlikely to hire").

Read more: ESGbfinancePRIDaniele GoldbergKathryn SaklatvalaUN Sustainable Development Goals
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