How schemes and managers can align ESG beliefs

Evolving investor values, regulatory pressure and global challenges are heightening the need for trustees and asset managers to be on the same page regarding how ESG factors are embedded into investments.

Some 72 per cent of savers consider ESG factors when investing in their pension, according to research from Aviva Investors, posing the question of whether schemes should reflect this in their holdings.

With mounting pressure to meet savers’ expectations, fulfil unprecedented reporting demands and carry out governance exercises, the need for ESG leaders to adopt a shared vision is now more important than ever.

We would encourage trustees to question asset managers on how ESG analysis is integrated into the investment research process

Sarah Peasey, Neuberger Berman

Defining beliefs

For pension schemes, the first step to ensuring asset managers’ ESG alignment is to make certain that leaders from both groups can collaborate to embed sustainable practices, in line with member and regulatory needs.

Sustainability consultancy Gordian Advice founder Nick Spencer says trustees’ ESG beliefs are an integral part of the scheme’s broader investment principles, which will be “embedded throughout their investment strategy and its implementation”, therefore demanding compatibility with an asset manager’s offering.

But the same is true for asset and investment managers. To meet the demands of institutional clients, cooperation and a shared vision are vital, says Neuberger Berman’s European director of ESG Sarah Peasey.

There may well be “creative tensions on ESG beliefs” between trustees and managers, Spencer adds, and “persistent, endemic differences” may force trustees to look elsewhere.

Meeting needs

At present, the investment landscape is focused on the “client-centric approach” being offered by investment managers, says Peasey.

This trend has culminated in more clients looking to “co-create solutions with ESG at their core”, such as net zero multi-sector credit capabilities, public equity impact strategies, global high-yield Sustainable Development Goal engagement practices and private markets climate solutions.

But leaders coming together to settle on a strategy is only one factor in how trustees and asset managers develop concordant attitudes towards ESG.

Trustees must also scrutinise the processes of managers in this area, taking into account factors such as data handling, reporting methodologies and track record on overcoming shortcomings rather than perpetuating them.

“We would encourage trustees to question asset managers on how ESG analysis is integrated into the investment research process,” and whether “this takes place at the investment team level rather than being carried out by a separate or central ESG unit”, Peasey says.

A responsible manager will “encourage that challenge”, points out professional trustee company ndapt’s managing director Marcus Hurd.

He believes “getting beyond the rhetoric” is key for transitioning from a discussion of beliefs and wishes to then focus on “real-world decisions”.

In particular, trustees must ask whether shared ESG beliefs “make it through” to active stewardship and portfolio selection activities.

There can also be value in identifying how prolific ESG strategies are beyond sustainability-centric teams and leaders, says Ninety One sustainability director Daisy Streatfeild.

She notes there is a risk of “misalignment at the fund level” if only an asset manager’s sustainability team “can explain a manager’s beliefs and approach”.

“Integration across the business and application of the approach at all levels of the business is key,” Streatfeild adds.

Neuberger Berman’s Peasey echoes this sentiment, saying that many clients give the quality of ESG integration a “formal weight in deciding who to partner with”, with some making it a substantial consideration, “particularly for sustainable or impact mandates”.

Industry-wide change

For the pensions industry as a whole, the need for collaboration, shared knowledge and close alignment has resulted in the launch of several initiatives to aid stakeholders in developing best practices and support around effective approaches.

Groups such as the Institutional Investors Group on Climate Change, the Sustainable Markets Initiative and the Principles for Responsible Investment have risen to prominence on the back of the need to align ESG understanding and promote cooperation between investors and asset managers.

The collaborative and communicative ethos of these groups is resulting in renewed efforts to promote collaboration within asset managers too, says Peasey, with several companies now disclosing their voting policies as a result.