The challenges of ESG implementation are outweighed by the rewards

Environmental, social and governance (ESG) is attracting a significant pool of investors especially in Europe and whereas historical debates focused around the possible benefits and drawbacks of responsible investing, the discussion has moved on.

The processes behind ESG investing represent a layer of risk management complementary to traditional quantitative risk management metrics, placing a framework around what can be casually be termed a “responsible” approach. The next chapter for asset managers is about formalizing ESG processes and communicating this to investors.

One increasing complaint voiced by asset owners and other stakeholders is that many managers have failed to actually implement on the commitments they have articulated with respect to their ESG activities. Cynics may simply see such shortcomings of asset managers as an indifference to actually addressing ESG issues, however,  I believe that in many instances it is not an insincerity of intent but rather falling short on execution. With this often cited gap between “commitment” and “delivery” in mind, I believe our experience over the past several years may be instructive for both other managers and the clients they serve.

We have a 20+ year legacy operating across asset classes on an extremely global basis – Equities, Fixed Income, Private Equity – across the Americas, Europe, Central Europe, Sub-Saharan Africa and Asia. As a result, we have long faced ESG related issues that can have a meaningful impact on portfolio performance. Addressing ESG issues has been embedded throughout our investment processes for decades – although early on we didn’t always explicitly delineate these considerations in our processes and communications with clients.

Several years ago and from early discussion with stakeholders across the firm, it was clear that our work around ESG must be an “organic” effort that articulated and built upon our existing investment philosophy, process and culture.  We were not looking to change the core of our well established and effective investment processes or graft a  “new” ESG capability onto the firm – it needed to be complementary. At the same time, it was important that the position we communicate to our clients and others regarding our position on ESG be authentic and not simply a “greenwashing”. In short, the focus of our work would need to be primarily internal.

Prior to this internal distillation of knowledge from across our investment colleagues, a critically valuable first step was engaging an external partner (a leading ESG research firm and consultant serving both Asset Owners and Asset Managers) to help us with this work. We had several goals in engaging an external partner; to obtain efficient access to industry level best practices and most current thinking around ESG topics; access an objective 3rd party perspective on our existing processes as they relate to ESG; and have a partner to help us articulate our own practices in ways that would be most effective in supporting our dialogue with clients on these topics.

The external perspective we gained from the consultant was hugely helpful at the beginning of our work, primarily by helping us to develop a clear roadmap on how best to proceed.  Through the consultant’s interviews of portfolio managers across the firm and a thorough review of our existing communications on ESG there were two clear take-aways. The good news was a confirmation that our existing investment processes, while varying across asset classes, were generally quite robust and effective in identifying and addressing ESG issues that could impact our client’s portfolio. The bad news (although not a surprise) was that we were quite poor in articulating these processes both internally and externally. These two observations drove much of the “Strategic Roadmap” we developed and which have guided our efforts over recent years.

Of course, the key and biggest challenge with any large endeavor is translating “strategy” to “execution”.

As previously mentioned, it was important to be crystal clear on both the goals and parameters for the ESG effort.  A clear articulation of objectives, given the breadth and depth of ESG issues was key so we needed to employ a firm degree of focus to ensure the most impactful issues were implemented. We had two specific goals; improve our engagement with clients on ESG issues, and ensure an effective approach to ESG considerations in the portfolios we manage.

The working group identified a number of deliverables which could be assigned to a small number of individuals on a defined working group. When clearly delineated and resourced, these deliverables became far more manageable.  The specific activities included such discrete tasks as; reviewing existing ESG resources available to the firm, identifying additional resources that warranted consideration,  identifying and sharing best practices across investment teams, identifying ways in which centralized investments in ESG resources by the firm could be leveraged by our diverse investment teams globally, facilitating forums and mechanisms through which information could be shared within and across investment teams, identifying ESG forums and associations that would be worthwhile to engage in, more effectively capturing concrete examples of situations in which ESG related aspects of our processes delivered or protected value in the management of portfolios.

We certainly don’t have all the answers and there is still work to be done but this has been a rewarding endeavor so far which, at this juncture, I am confident will continue to generate valuable benefits in both the portfolios we manage and our relationships with the clients we serve.  Several recent fixed income mandates awarded to us by clients for whom ESG considerations were critical confirmed to us that our efforts have been effective. I am confident that prior to our work on ESG issues these past few years, we would have effectively addressed ESG considerations within these portfolios, however, the work we have done allowed us to more effectively communicate this ability to these clients and, in doing so, secure their trust in us. As asset managers the formalization and communication of ESG processes is what asset owners now demand.

 

Anthony King is regional CEO, Europe at PineBridge Investments

 

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