By Tamara Close
While ESG integration practices vary widely among managers – from initiated to sophisticated – it is not always easy to know how a manager is integrating ESG factors into their investment and risk management processes without a comprehensive analysis of their ESG integration practices.
While managers are all at different stages in their ESG integration journeys, there are a few things that investors can easily check which can help determine how a manager is integrating ESG into their investment and risk management processes, before doing a more comprehensive analysis.
Below are 5 things investors can easily check (most of this information should be available online on an asset manager’s website) and should discuss with their investment managers.
The List
One: Standalone ESG Policies
The interconnectedness of ESG policies with other corporate policies is an indicator of the breadth of ESG integration within an asset management firm. Firms whose ESG policies state that E, S and G issues are considered as material risks for their investments or funds, should also have Enterprise Risk Management (ERM) policies that identify E, S and/or G issues as material investment risks for the firm. If these issues are not reflected in the ERM, then this is a strong signal that the ESG policy is a stand alone policy, and that a manager may not consistently integrate ESG factors into their risk management framework.
Two: Organizational Structure
The interconnectedness of ESG policies with other corporate policies is an indicator of the breadth of ESG integration within an asset management firm. Firms whose ESG policies state that E, S and G issues are considered as material risks for their investments or funds, should also have Enterprise Risk Management (ERM) policies that identify E, S and/or G issues as material investment risks for the firm. If these issues are not reflected in the ERM, then this is a strong signal that the ESG policy is a stand alone policy, and that a manager may not consistently integrate ESG factors into their risk management framework.
Three: Size of the ESG Team
If a firm has a standalone ESG team or dedicated ESG specialists within the firm, the size of the team, or the number of ESG specialists within a firm, is also a good indicator of the depth of ESG integration practices at a firm. Firms may claim to undertake multiple integration practices, such as ESG integration across all investments, risks and opportunities, engagement with investee companies, proxy voting, etc. However, if the team is composed of only a few resources, the firm may not be doing all that they claim, or at least not in a comprehensive fashion.
Four: ESG Knowledge and New Hires
Some managers may claim that ESG knowledge is a key requirement for new investment personnel. Posted roles for investment-type jobs should then include ESG knowledge (or a variant thereof) in the job description. The absence of this requirement in new postings may mean that the manager does not put as much weight on this skill for their investment teams as they say they do.
Five: Proxy Voting and Securities Lending
Securities lending can be a profitable exercise and is an efficient way for firms to leverage their capital. However, one of the key underlying tenets of a securities lending transaction is that the lender is no longer the beneficial owner of the securities. This means that a firm cannot vote any of their shares if they have lent them out. While shares can be recalled for votes, and indeed many managers will recall their lent out shares for votes, this should be explicitly stated in securities lending agreements with agent lenders. To avoid confusion, managers that explicitly state that they vote all of their shares and also partake in securities lending activities should clarify if they also recall their shares for proxy voting. If they do not recall their shares, then they are not voting these shares.