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IR 2020 review: manager operations scrutinized through ESG lens

January 2021

28 January 2021 - Investors continued to demand higher levels of transparency from managers throughout 2020 on their Environmental, Social and Governance (ESG) principles, processes and procedures – a trend that accelerated during the pandemic and one that is here to stay in 2021 and beyond.

The increased presence of ESG factors in the investor relations process has been steadily gathering pace since 2019, but the effects of COVID-19 and its myriad of social responsibility and governance concerns have accelerated the process as we venture into 2021.

The net result is that ESG considerations are now firmly entrenched in the investor relations process. For some investors, managers’ operational performance on ESG can be as important as their investment performance.

However, how did this come about?

The Citco group of companies (Citco) hosted a recent roundtable with investor relations leaders to explore the latest trends on ESG as a determining factor in the manager selection process. During the roundtable, panelists marked early 2019 as the inflection point at which ESG truly established itself as a key factor within investment decision-making – but a series of measures last year solidified its presence indefinitely.

Last year, we saw some of the world’s largest alternative investment managers indicate they would vote against directors of companies that underperform on material ESG criteria in their annual communication to CEOs. In addition, we saw US regulators increase their focus on ESG. In the first quarter of 2020, the U.S. Securities and Exchange Commission (SEC) launched an ESG advisory committee to provide diverse perspectives on asset management and ESG practices. While the committee’s subsequent recommendations for ensuring greater harmonization of ESG disclosures by public companies remain under review, greater proactivity on policy is predicted under a Biden presidency.

There was a shift in focus from environmental issues to social responsibility following the onset of the COVID-19 pandemic. More specifically, COVID-19 introduced additional scrutiny over governance considerations, namely how managers have supported their employees during the pandemic through remote working practices, workplace safety and future flexible working policies. Social factors grew in significance, given the implementation of social distancing and sustainable health practices for those remaining in the workplace, as well as increasing attentiveness to employee wellbeing across organizations.

Throughout this period, the role of investor relations has been significant. Institutional investors, as well as family offices, endowments and foundations, have continued to request increasingly detailed information in their Due Diligence Questionnaires (DDQs) and as part of their overall Operational Due Diligence (ODD) processes. They demand that managers have an ESG policy and provide regular metrics on the performance of activities outlined within said policy.

It is now clear that a manager’s operations – in addition to their investment decisions – are being scrutinized through the lens of ESG. ODD professionals have increasingly emphasized the need for managers to demonstrate evidence of fair hiring policies and governance in order to improve overall diversity and inclusion, which has been linked to improved business operations and investment performance. Within investment due diligence, investors have become increasingly wary of ‘greenwashing’, and look to uncover a tangible commitment to sustainable ESG practices as a critical factor in the manager selection process.

Asset servicers play a crucial role in helping investment managers’ investor relations teams to meet these demands. Vast amounts of data collected by asset servicers regarding the funds they administer means they are perfectly placed to contribute to further ESG transparency. Asset servicers should be leading the charge in creating overall sustainability reporting metrics and bespoke solutions that transparently and consistently evaluate and report on a manager's ESG strengths.

Looking to 2021 and further, we expect ongoing momentum in ESG reporting by investor relations teams. By providing greater transparency and consistency through proprietary tools and technology, Citco will continue to guide our clients as your truly independent asset servicer and trusted partner.

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