Top ESG considerations for asset managers at the corporate level

27 October 2022 - Environmental, Social and Governance (ESG) factors have been making headlines for a number of years, but a lot of opaqueness around what and how it is incorporated into the investment industry still persists today.

The rise in discourse relating to ESG themes has prompted investors and regulators alike to pile the pressure on asset managers to be more transparent with their ESG efforts, in the hope of pushing for more meaningful and genuine approaches, whilst reducing the risk of greenwashing.

As a consequence, asset managers are drilling into how these topics fit their unique investment processes and their corporate operations in order to strengthen processes and provide insight to their end investors, but a lack of standardization has created a landscape that can be hard to decipher.

According to Citco data, the frequency of ESG-related RFP questions has seen close to a three-fold increase over the past two years, with the most prominent corporate themes in investor questionnaires focusing on approaches to workplace Diversity, Equity and Inclusion (DEI), corporate ESG governance, and supplier due diligence.

So, what actions can asset managers take today to navigate and manage the evolving corporate ESG landscape? We recently brought our consultancy firm, NorthPeak Advisory, into our London office to discuss with clients a few areas to focus on, and below we look at the core factors now being considered:

CORPORATE VS INVESTMENT

Firstly, it is important to acknowledge that there are in fact two sides to the ESG coin. On one side, there is the widely recognized investment sphere, prone to a multitude of varying approaches depending on the investment objective, strategy and asset class and subject to increased regulation to create standardized disclosures. On the other side sits the somewhat overlooked corporate level, encompassing a company’s own approach to ESG-related material priorities. While the investment side remains clouded with complexity and the lack of an established and uniformed approach, the corporate-level landscape consists of relatively straight forward actions that can be taken immediately.

NO ONE SIZE FITS ALL APPROACH

At the corporate level, there is no one-size-fits all approach across sectors. The relevant material issues for a company depend on various factors, including the industry it is in, the company size, or the location it is based in. For example, for the manufacturing industry, companies have been rewarded for prioritizing topics such as water and waste management, labor practices, or product lifecycle management. While for financial services, the emphasis might be more on employee engagement, DEI, or business ethics. As such, one needs to carefully consider which ESG topics are of most strategic relevance for the business and all its stakeholders.

CLIMATE ACTION

Addressing a company’s impact on the climate is increasingly prominent at the corporate level – all firms can look at where their emissions come from, whether this be sources such as employees commuting or electricity consumption, and set reduction targets accordingly. Target setting, for example aiming to be net zero by 2030 or aligned to the Paris agreement, is a useful benchmark to have – however, firms must have a clear plan of action on how they will achieve this objective.

Indeed, investors and regulators are already pushing for companies to make climate disclosures at a firm level more standardized in order to achieve transparency and accountability.

DIVERSITY, EQUITY AND INCLUSION 

The financial services industry has come under increasing scrutiny regarding DEI. Indeed, having an inclusive work environment where individuals are valued for their differences helps to create a culture where group-think is avoided and people are motivated to perform better – in turn, firms must do the upmost to support and foster a more diverse talent pool.

This is not a quick fix. A long-term strategy is needed to ensure that the right culture and environment is created to cultivate an inclusive, equitable and un-biased work place. This requires assessing where potential barriers exist, engaging with employees, and addressing potential unconscious biases. Firms can also look at supporting internships or scholarships to proactively increase the opportunities for diverse talent to enter the industry.

Such efforts can go a long way to creating a prosperous environment that empowers the workforce to thrive, evidenced by improved business performance.

FIRM REPORTING

Transparency is key and should underpin all activity on the reporting side. For corporates, the size of the firm largely determines what can realistically and sensibly be reported on. Larger firms may consider voluntarily aligning their reporting with the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB, now part of the Value Reporting Foundation, and ISSB), or the Taskforce on Climate-Related Financial Disclosures (TCFD) – all of which are universal and well-established. A smaller firm may not have the adequate resources to compile lengthy reports, but they can still attempt to align with the above frameworks where relevant.

Similarly, since not all ESG topics are relevant for all firms to the same degree, companies in more resource-intensive industries (for example, energy, mining or manufacturing) may also need more resources to analyze and quantify their impact on the environment and individuals in the society that they operate in. In contrast, a professional services firm may find it relatively straight forward to quantify any impacts and will likely choose to focus on human capital related topics and more qualitative elements.

Ultimately, the focus should be on reporting on things that matter – being transparent around corporate-level ESG strategies, and clearly defining how a firm aims to hit targets going forward, provides investors and staff with clarity and confidence that approaches are well thought through. No one is expecting a complete dataset with the perfect strategy from the onset, and therefore it is important to genuinely communicate progress and objectives.

As the crack on Greenwashing continues across the industry, better data collection and reporting practices will help shed light on the extent of challenges the industry faces – so if firms act now to address ESG issues on the corporate level, it will pave the way for the industry as a whole to advance.

By Christina Rehnberg, NorthPeak Advisory’s Senior Associate Consultant, and Dr Megan Whelan, Citco group of companies’ (Citco) Head of Sustainable Health, Citco (UK) Limited