It is a little more than 10 years since the Principles of Responsible Investment organisation was established with a Mission Statement reading – “We believe that an economically efficient, sustainable global financial system is a necessity for long-term value creation. Such a system will reward long-term, responsible investment and benefit the environment and society as a whole.”
As the recently completed 2017 Peter Lee Associates Investment Management research program shows, Responsible Investment – now better known in Australian investment circles as ESG – appears to be gaining quite a bit more traction amongst pension funds as a selection tool when looking at potential managers to run their money – and it’s not just the big boys moving in this direction either.
This increased emphasis on ESG became obvious to us when we asked fund executives how important is it that their investment managers integrate ESG in their investment process. More than half of the funds looking to award Equity Manager mandates regard such integration as very important or critical – whilst only 14% rate this factor as essentially unimportant. Although fund executives seeking Fixed Income managers do not generally rate ESG integration as highly (34%) it is still clearly a significant point of reference in their decision-making process – and has become more important over the past 5 years. Perhaps not unexpectedly, it is the Industry and Government funds who are leading the charge but when we break the data down by size of institution we are seeing funds with less than $1 billion embracing the methodology to a greater extent, than some of the larger ones – and given these are largely foundations, endowments and not-for-profits, who are more able to readily pursue impact investing, it does suggest the trend is not going away.
So how does this compare with previous years? Despite ESG having existed for just a short period of time it has been an aspect of the Investment Management landscape we have followed through our program so we do have back data.
Whilst the wording of our questions has altered over time, responses to them still provide an indication as to how ESG has increased in popularity as a factor used in determining where a mandate goes and how perceptions as to its importance have changed amongst fund executives and asset consultants. In 2009, only one-in-five asset consultants had ESG as a criteria for shortlisting managers for equity mandates — but over 60% concluded that ESG was gaining importance as an evaluation criteria irrespective of asset class. However, even by 2011 a high 34% of fund executives still ascribed little or no importance to ESG when awarding mandates.
The critical difference in the treatment of ESG in portfolios over the past decade is that while some funds continue to employ mandates with a specific ESG or SRI focus, increasingly fund executives expect investment managers to integrate ESG thinking across the entire platform of solutions.
So it appears that, as PRI enters its 11th year, ESG has finally become a benchmark of sorts for pension funds. As this trend further evolves it will be interesting to observe if it has any ramifications for those who decide not to embrace it. Only time will tell, but clearly ESG is much more than a fad and has now become well entrenched in the psyche of the local investment management industry.