August 13, 2018 – Aon plc has introduced a new ESG manager rating scheme.  The system, which rates managers on a 1 to 4 scale, is designed to evaluate how well managers integrate ESG factors into their investment processes.  The ratings are based upon qualitative factors including a manager’s “responsible investment-related policies and procedures.”  It also assesses whether a manager’s process is “credible, robust, consistently applied and repeatable.”  AON’s represents that its process is consistent with the UN’s PRI framework.  An independent third-party opinion, even as it may be applied internally in manager evaluations, in our view is always useful and will prove especially useful in responding to institutional client questions about if and how well investment managers integrate responsible investment considerations, and more specifically environmental, social and governance (“ESG”) data, into their investment strategies. Such ratings do add credibility to the evaluation of investment choices, but it is first important that any such ratings have an historical record that can verify the rating’s reliability over various market intervals and cycles.

August 10, 2018 – There are signs that academia is developing a growing interest in “promoting greater rigor” in “companies’ environmental and social performance.”   Kate Allen states in a recent Financial Times article that this interest is in part, fueled by concerns that investors are allocating capital “using unsophisticated data”.  The newly (2017) formed Global Research Alliance for Sustainable Financing and Investment is spearheading efforts to address data quality and “unclear metrics” on company ESG performance. We also think that efforts to building better ESG data and measurement standards are needed.  However, the question of how these standards can be used lingers.  This is especially the case when portfolio managers are apt to employ varying investment styles, security selection, portfolio construction, allocation and management approaches.

August 9, 2018 – A recent survey by Callan concludes that “ESG adoption rates” for US asset owners i.e., institutional investors, has been on the rise.  The survey found that in 2018, 42% of such investors included ESG factors in their investment decisions as compared with 22% in 2013.  Further, it found that well over half of foundations (64%) and endowments (56%) incorporate ESG considerations into their investment processes.  At the same time, only 20% of “corporate funds” including DC plans, do.  Callan feels that these results show that institutional investors are “finding implementation approaches that match their funds’ goals” with regards to ESG investing – a step beyond simply educating clients about the benefits of sustainable investing.   We agree with this conclusion and also that it may mean that US institutional investors are moving beyond focusing on a learning role to one of incorporating ESG factors into their “everyday” investment and management selection decisions.  The next step is to do the same for retail-based fund products.

August 1, 2018 – Based on discussions at this spring’s Sustainable Investment Forum in Paris, The Beam asks why isn’t there a closer “alignment” of financial markets and investors on the “climate economy?” It is suggested that the answer it is not just the result of “inaction” on the supply side, but also the result of “systemic issues … that largely depress demand” on the part of investors.  To solve this imbalance, action by the financial markets alone will not do because of “global carbon externalities against them”.  A possible solution is for the financial sector to use its weight and influence with other stakeholders, especially “governments and other public policy makers.” We agree, but we also think that those with a fiduciary duty to their shareholders may have reasons for waiting on public policy makers to take the lead.  We also think that this lead requires trade-offs on both sides.  If anything, the recent DoL released pension plan instructions clearly shows the need to possibly rely less on what may be the over-politicized technicalities of ESG integration.

August 1, 2018 – In an interview with Eric Usher the head of the UNEP Financial Initiatives, as reported in The Beam, he states that the financial sector should take a more “holistic approach to extra-financial analysis” to spur on ESG integration.  He states that “Impact is becoming a new sort of currency” especially with the growth of the information economy and related business models.  This means that companies will become more “impact-based” and “central” for all actors in the ESG debate.  Concepts such as Standardized Disclosure Guidelines (“SDG”) which encourage “standardized taxonomies” and overall standards “to better categorize, measure and channel climate finance” are expected to take the forefront as impact-based concerns grow. Agreed, but we think that asset management companies face a complex trade-off–that being how to standardize a portion of their investment processes while at the same time distinguishing their specific management approaches.

August 1, 2018 – A survey by Aberdeen Standard Investment and Sustainalytics of its clients found that over 3/4ths (76%) “considered ESG integration when awarding mandates to asset managers.” However, only a small portion (24%) are using smart beta ESG strategies.  This is considered unfortunate, because the study also suggests a “deeper integration of ESG consideration into smart beta strategies” would benefit the growing popularity of both investment approaches. We agree that it may help, but we are more concerned that it may confuse investors, particularly those in the individual or retail segment of the marketplace.  Further, by “marrying” strategies, one approach may be overshadowed by the other in terms of which adds or detracts from performance, risk, or in meeting other investor sentiments.