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Wide Differences Between Asset Managers With ESG Integration

Despite growing demand from investors and regulators for more environment, social and governance (ESG)-compliant approaches to portfolio construction, there are still wide differences between asset managers in terms of how they integrate ESG into their investment processes, according to a new study from Scope Fund Analysis.

The study covered 30 large international fund managers from different countries and regions and 12 large German firms, with aggregate assets under management of almost €44 trillion.

In general the analysis showed how strongly the topic of sustainability has permeated the companies.

However, “none of the providers achieved flawless ESG integration in line with our approach, but many large asset managers are on the right track and are proving that they can keep pace with the growing requirements for sustainable investment and have gone a long way in their ESG integration,” said Said Yakhloufi, group managing director for Scope, and author of the study.

The research showed that the fund manager with the highest score was Federated Hermes. The US asset manager was the only provider to achieve a three-digit score and come close to the maximum score of 116.

Federated Hermes not only demonstrated very high ESG integration in the ‘investment process’  category but also excelled in the ‘engagement’ segment.

Candriam, one of the pioneers of sustainable investment, was second with a strong penetration of sustainability aspects. In the investment process area, it performed better than Federated Hermes, but slightly worse in the area of “engagement’.

Third place was taken by Neuberger Berman. It won points because its ESG analysis was integrated into the investment research process of the investment teams and was not carried out by a separate or central ESG unit.

ESG data sourcing was supported by innovative methodologies, drawing on the experience of the chief data scientist and big data teams.

The top five was rounded out by Robeco and HSBC Asset Management, respectively. The former, also a veteran in sustainable investment, was praised for each investment team independently identifying and determining which material sustainability factors are decisive for its investment process.

The Dutch fund manager then systematically integrates the analysis into quantitative and fundamental analysis. “ The report summed it up by noting, “A very successful and active involvement of decision-makers.”

As for HSBC AM,  the report pointed to exemplary multi-level ESG research on companies, sectors but also selected topics with the aim of both supporting investment teams in their ESG due diligence and providing ongoing training.

In terms of the methodology, a total of 58 topic areas were included in the study, covering investment processes and corporate governance, as well as engagement efforts to encourage portfolio companies to act more sustainably.

The resulting questions and answers chosen from the UN Principles for Responsible Investment (UN PRI) transparency reports were considered to be indicative of the level of the manager’s integration process.

In addition, Scope analysts examined websites, brochures and other material of the fund managers, especially if questions in the UN PRI reports were unanswered.

“In this way, we ensured that all relevant issues were considered as fully as possible,” said Yakhloufi.

Overall a total of 58 topic areas were considered for the study. They ranged from investment processes and corporate governance to the  stewardship efforts to encourage portfolio companies to act more sustainably.

Of the 42 managers that Scope assessed, some were excluded either because they answered “not applicable” to some questions, or marked others as private.

Depending on the extent of the ESG efforts, the group awarded points based on the number of sustainability aspects asset managers had taken into account.

It said the requirements set were to demonstrate comprehensive sustainability efforts across so many areas are simply too high.

However, the report noted some large companies are on the right track and are proving that they can keep pace with the growing requirements for sustainable investment and gone a long way in their ESG integration.

However, it is also clear that among the major providers analysed there are leaders and laggards, and the issue of sustainability has not been equally well received everywhere.

Questions about the extent of sustainability efforts have gained in importance because of the increase in accusations that companies are presenting themselves as greener than they are.

“When more and more providers are accused of greenwashing, this shows how urgent and relevant it is to investigate an asset manager’s level of ESG integration. “ said Yakhloufi.

This article first appeared on Best Execution, a Markets Media Group publication.

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