Mainstream Fund Managers Vary Widely on Social Responsibility

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 Kember.

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 reports.

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.

"Responsible Investment 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.

"A surprising 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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