July 01, 2008
Mainstream Fund Managers Vary Widely on Social Responsibility
by Anne Moore Odell
Even as more fund managers accept the impact of environmental, social, and corporate governance
issues on performance, the application of responsible investment practices is hit or miss with most
The majority of mainstream fund managers aren't engaging with the companies they invest with, finds
RImetrics in their report "Responsible
Investment 2008." Across all five of the key responsible investment categories identified by
RImetrics, an independent research and consulting firm based in London, asset managers show wide
discrepancies from manager to manager concerning accountability and transparency, engagement,
integration, strategy, and voting.
Examining fund managers with over $12
trillion of assets under management, including more than half of the world's leading 20 fund
managers, RImetrics reports a wide range of socially responsible skills among managers from fund to
fund, and also internally within funds. Communication between managers and their clients on
environmental, social and corporate governance (ESG) issues is limited, with clients rarely
consulted on socially responsible investment strategies.
"The industry as a whole is a
long way from best practice: although asset managers increasingly accept that ESG factors can
influence investment returns and risks, most have yet to develop the corresponding competencies
systematically across their organization, " write the report's authors Jonathan Horton and Josie
RImetrics evaluated fund managers from around the world, comparing each manager to
a series of Best Practice Principles that measured 22 aspects of SRI competency. RImetrics found
that investment skills and research once thought to belong to the socially responsible investing
(SRI) world are becoming more mainstreamed. However, many managers are struggling to incorporate
ESG issues into their practices.
"Asset managers are included in our assessment process
either because a pension fund client has requested us to include specific managers (usually when a
pension fund is undertaking either manager selections or manager appraisals) or because the asset
managers themselves agree to be included," said Jonathan Horton CEO of RImetrics and co-author of
the report. "The majority of our work to date has been in helping pension funds gather comparative
responsible investment data on managers short-listed for equity mandates."
One of the
reasons for the lack of application of SRI strategies is that very little training and formal
development is built into the mainstream funds. Another reason is that many funds have not measured
the impact and costs of SRI activities for their organizations.
Yet the number one problem
for the managers studied by RImetrics is the "lack of clear, strong signals from their asset owner
clients." Sixty percent of asset managers didn't consult clients in the development of their SRI
policies. This leads to policies that don't accurately reflect clients' priorities, RImetrics
Horton explained, "Miscommunication plays a part; asset managers often don't know
what is really important to asset owners, and asset owners can't tell what managers are really
doing; for example, our analysis suggests asset managers rarely consult clients in the development
of responsible investment policies; but this is not the whole story. It is difficult to single out
one issue. The relevance of responsible investment to mainstream asset managers and pension funds
is another facet."
"Our research suggests an increasing number of managers are
incorporating ESG issues into the investment process, because they see investment opportunities,
but few if any asset owners are properly evaluating this competence as part of their managers
election process," continued Horton.
Of the five key responsible investment themes
identified by RImetrics --- accountability and transparency, engagement, integration, strategy, and
voting-the strongest rating among managers was proxy voting. The weakest area for managers was the
integration of ESG information and analysis.
RImetrics keeps its ratings data
confidential but comparative ratings are available to its clients. A pension fund client will see
rating and ranking data for the managers assessed at their request. RImetrics also provides
benchmark data to asset management clients.
The variance in approach to ESG issues is wide
between managers, between managers within the same organization, and even within a single manager.
For example, two-thirds of managers had different engagement policies for different markets.
Even for the managers who engage with companies, a "large proportion" of them do so to get ESG
information, with many less engaging to change companies' behaviors. Importantly, a majority of
managers doesn't monitor or track the costs of engagements with companies, with 30% not keeping any
trail of engagement activities at all.
Although firms might carry out some ESG research
and analysis, most (70%) managers have no follow up or post investment analysis to see if the ESG
information is actually considered by investment managers.
2008"concludes that although SRI is still thought of as a specialist approach, managers are looking
beyond companies' financial records to consider their non-financial reports.
number of managers don't have policies in place covering how ESG should be integrated; many just
'assume' it will happen," said Horton. "Even where there are policies in place at the top level,
often the individual managers have not had sufficient training in understanding ESG issues and have
not necessarily bought into the notion of responsible investment, or the relevance and importance
of ESG factors in investment decision processes. Few, if any, asset managers have any processes for
measuring integration or monitoring whether investment managers are taking ESG into account, so
there is no way to ensure systematic integration."
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