How to apply an ESG lens to manager selection & oversight

By Adelina Romanelli, CFA, Manager, Investment Research, SLGI Asset Management Inc.

October 5, 2021

Applying an environmental, social and governance (ESG) lens to an investment can turn up many things. It could, for example, reveal that a company’s approach to environmental sustainability is effective, or perhaps there are embedded risks that could challenge its business model.

That’s why it’s worth asking the question, what would happen if you turned that same lens on an investment manager’s own approach to ESG?

Determining the extent of an investment manager’s commitment to ESG is increasingly important as it transforms from aspirations, to policies and ultimately systematic implementation. Today, an important proportion of investment managers have stated ESG commitments and are committed to raising the bar. Bloomberg estimates that based on a 15% growth rate (half the pace of the past five years), ESG managed assets in 2025 could represent more than a third of the projected US$140.5 trillion in total financial assets1.

To start with, an analysis of an investment manager’s ESG approach may reflect how deeply the manager believes in meeting ESG targets, or implementing its ESG policy. Certainly, so-called ESG fundamentalists (investment managers that have thoroughly embedded sustainably as the only path towards financial security and wellbeing) are likely to follow a robust approach to including ESG factors in their analysis. Moreover, their ESG objectives would likely be supported by a clearly defined governance model. They may also enjoy strong backing of executive leaders with board-level accountability.

What should we look for to determine just how ESG-engaged an investment manager is? A track record of regular and ongoing ESG analysis of portfolios, as well as dedicated ESG resources, internal and external collaboration, formalized training programs and more.

It should also be evident that the values of the investment manager as a whole support ESG integration, which helps provide an enabling culture. Such a culture could further empower managers by encouraging them to integrate ESG considerations into all aspects of their investment decisions. And such staunch support can foster greater awareness and deliberation, and may lead to creation of portfolios with a greater degree of ESG integration.

However, even when supported at the corporate level, approaches to investing under an ESG umbrella can become blurred. For example, an increasing number of managers (public and private) are moving to broaden their offerings of lower carbon or decarbonized portfolios. For others, investments in areas like the energy sector may be viewed differently, depending on who is looking through the ESG lens.

This is because on one side, there are those who believe energy companies can contribute to the transition to a lower-carbon economy, given the scale of the industry and technology employed in it. For instance, development of carbon capture technology and the use of natural gas as a cleaner transition fuel as renewables are built out.

So on one side of the ESG equation, you could have managers who pursue carbon reduction or exclusion, while others take a nuanced view. From an investor’s point of view then, it’s important to understand why and how a manager factors in a multitude of intrinsically linked ESG considerations.

Assessing a manager’s philosophy around active stewardship can also be revealing. Indeed, exercising effective stewardship among the companies represented in a portfolio on behalf of investors, not only shines a light on investment culture, it also reveals the degree of ESG awareness that the manager has. A proactive approach to active stewardship may ultimately foster greater long-term resilience in a portfolio, benefitting both the investment firm and investor.

Ongoing Monitoring and Communications

ESG integration is a journey. Assessments thus necessitate ongoing monitoring of an investment manager’s actions towards systematically integrating ESG factors into its investment strategy.

This can include quantitative analysis of the portfolio. As well, third parties could be engaged to measure each portfolio’s ESG characteristics. This includes tracking how fund characteristics change, both over time and versus peers, to identify areas in which a fund appears to be departing from its stated ESG promise.

Transparency around how a manager reports on its ESG investment outcomes is also key to understanding both the company’s (as a whole) and individual manager’s approach. Determining if an investment firm has signed on to the United Natio Principles of Responsible Investing is a good place to start. Doing so requires a firm to clearly report their progress annually. In turn, the UN PRI will deliver another level of transparency by auditing and measuring their progress.

Finally, ask whether a company is contributing towards sustainable investment practices by sharing best practices with the broader investment community by taking part in various public task forces and participating in sustainable-oriented investing initiatives. Engaging more broadly on policy and regulatory issues on various systemic issues can move the dial, creating meaningful change and benefiting a multitude of stakeholders.

Investment manager checklist

In-depth analysis drives ongoing engagement activities

Firm commitment Strategy implementation Active stewardship
ESG premise Areas of importance Strategic alignment
Governance and oversight Tools and methods Impact/outcome alignment
Resources, tools and data sources Feedback loop/collaboration Feedback mechanisms
Collaborations and training    

Sun Life Global Investments, as a fund of fund manager, is in a unique position to observe and assess ESG practices and ESG evolution among managers. The ESG journey continues to unfold at an increasingly accelerated pace and collaborations are highly likely to become the new norm.

 

Views expressed are those of the author and views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any mutual funds managed by SLGI Asset Management Inc. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell securities. This article is provided for information purposes only and is not intended to provide specific individual financial, investment, tax or legal advice. Information contained in this article has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy.

1https://www.bloomberg.com/professional/blog/esg-assets-may-hit-53-trillion-by-2025-a-third-of-global-aum/

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