【Idea Exchange】Manoj R. Dani, CESGA


Institutional investors and asset consultants need to differentiate among the wide variety of “green noise”, “climate thunder” and “proprietary” ESG methodologies of asset managers’ investment processes. 

Many asset managers often explain that they have a long history of engaging directly with company management on their capital structure, commercial strategies and any material ESG considerations. Most would claim they are corporate advocates who provide valuable feedback to inspire change and influence towards improving corporate practices, which in turn would (hopefully) manifest into higher ESG scores and ratings for their investee companies. 

In a crowded market, it becomes hard to have one’s voice heard and one’s ESG practices remembered. The challenge then is how to differentiate one asset manager from another. In essence, it boils down to consistency, authenticity and the clarity of messages presented. 

A typical fund manager might stake their claim to having adopted ESG for years. But this is often met with scepticism by most institutional investors. Decision makers and allocators simply wish to know what that means for them and their portfolios. Hence, regular engagement and dialogue with institutional investors are crucial. 

According to a KPMG report published two years ago, ESG investing is 85% driven by institutional investors, followed by 39% by institutional consultants. This means managers must invest time to understand how to frame ESG assessments and determine how to drive better long-term risk-adjusted outperformance and returns. There is always room to strengthen and sharpen a firm’s ESG processes and communication. 

Role of chief sustainability officer 

As ESG reporting frameworks such as the Task Force on Climate-Related Financial Disclosures, the Taskforce on Nature-Related Financial Disclosures, and the International Sustainability Standards Board, become widely adopted and aligned for reporting in 2023 and beyond, there is further pressure on asset managers to communicate regularly and be willing to face scrutiny and routine questions with confidence and credibility. 

A major challenge is how to address ESG appropriately and adequately within an organisation. Many asset managers now assign executive officers, sustainability professionals and risk teams to preside over ESG or responsible investing steering committees, with underlying sub-committees or strands. How effective can this steering committee be across different time zones and the fast-evolving environment? 

Just as a well-functioning and robust compliance department serves as an integral part of an asset manager’s operations, so too should firms establish a strong ESG or sustainability department, as opposed to creating “paper policy programmes” with limited monitoring and enforcement. 

As much as chief compliance officers often serve as important advisers alongside chief executive officers and report to the board of directors, there is reason to develop the important role of chief sustainability officer (CSO) to preside over an asset manager’s ESG practices and related risk exposure. 

The CSO would develop robust frameworks, incorporate ESG audits and should be empowered to stop old practices from being greenwashed, to close down non-compliant funds, enforce positive change, and report to the board.

The CSO’s team would be a potent disrupter established to challenge an organisation to think more broadly about ESG issues and compliance with sustainability reporting standards. The CSO needs to be an influencer for change to get the firm to shift its mindset and practices, and to execute the ESG and sustainability policy and practices. Such an influencer needs to have strong communication and persuasion skills. 

Internal alignment 

It is vital for asset managers to discuss internally and to receive feedback from staff as to what they feel are the firm’s ESG priorities, and how to incorporate them within the business and culture. 

To demonstrate authenticity, a firm’s own mission, culture and operations must align with how the team aims to foster real ESG practices, both within the company and from investee companies. 

Those who engage in ESG-related analyses or research should sharpen their skills to better present internally and externally to clients. This is common practice among many asset managers that include key research professionals in pitches and due diligence calls. Oftentimes, members of a research team are asked how they integrate ESG, and therefore it is vital to be fully aligned on the firm’s messages.

The road ahead is long and requires innovation, creativity and resilience. There will always be a need for constant upgrading and refinement. 

Engage, engage and engage

An asset manager’s messages on ESG must address what is important to their stakeholders. 

Through frequent engagement such as community meetings, online shareholder surveys and investor perception studies, managers need to ask questions of external audiences in order to produce a meaningful and responsive report or message. 

For example, how do stakeholder audiences view the importance of economic development efforts as opposed to board diversity? And to what extent do they require both? 

If stakeholders do not wish to be engaged, a manager should try and find out why and what’s missing. 

A common hurdle for fund managers is how to handle questions, challenges or pushback by prospective investors and asset consultants on ESG matters. There are no clear, apples to apples comparisons to differentiate between one ESG-integrated fund’s approach from another.

Investment consultants continue to “size up” asset managers’ ESG convictions by challenging them with recent academic research, or by posing in-depth questions on how ESG is integrated in fundamental research. They expect the asset manager to defend their investment thesis. Therefore, the manager’s team must work well together to prepare effectively for such questions and challenges. 

As long as the asset manager can consistently demonstrate how every idea, every thought process and every practice considers ESG at its heart, they will stand out. 

ESG is like a cross between the rolling thunder-ball in an Indiana Jones movie and the world’s biggest ball of wool. Pull the end of the thread at your own peril as this thunder-ball isn’t going away.