The United Nations Principles for Responsible Investment has released a new report on investment manager practices. The goal of the report is to help investment managers understand stewardship and sustainable investing practices within the context of PRI’’s mission. The report is a companion piece to one released in July 2022 that focused on action items for asset owners who want to build out sustainable investment practices.
The report’s findings are based on publicly available responses from 1,858 investment manager signatories that participated in PRI reporting in 2021. According to that data, almost 85% of investment managers said they make their overall approach to responsible investment publicly available and disclose important details about how it is implemented and overseen. A further 70% said they have a stewardship policy, while most track and manage climate-related risks and allocate responsibility to senior management teams.
The report noted that while these are positive headline numbers, there is significant room for improvement by investment managers. When analyzing the data, authors found that more than 70% of investment managers opted not to disclose how they deal with conflicts of interest in their responsible investments. Two in three did not publish how they verify and report on their investments internally, and almost 50% of managers did not report on having asset-class-specific ESG guidelines. Of those who did, some only applied to a small percentage of AUM.
More than 4,000 investment managers have signed on to be part of the PRI framework and include it in their investment decisions. However, the way each manager applies the PRI goals and mission are different. That creates a significant amount of variance within the data available from investment managers about their sustainability efforts.
None of this came as a surprise to Jeff Brenner, president and CEO at San Francisco-based IMPACT Community Capital LLC, one of the pioneers of impact investing. “There are a lot of new managers and allocators in this space, and how they view sustainability or view impact is going to differ widely,” he says. “To the extent that PRI can put some guidelines around how to measure and think about impact, that’s a good thing.”
Brenner says there is a lot of focus from managers on looking back at ESG portfolios to evaluate its impact, but less focus on how to actually create an impact. “We have a disclosed methodology, which makes us a differentiator. There is still a lot of work to do to improve metrics and key performance indicators throughout all types of ESG strategies,” he says.
The report’s findings showed a split between how investment managers pursue sustainable investing and what institutional investors give as their motivations for supporting sustainable investing. Investment managers “placed a lot of emphasis on processes, such as due diligence, financial analysis and decisionmaking, particularly for equity and bond mandates,” the report stated. “While the UN Sustainable Development Goals (SDGs) and having a positive impact were referenced frequently, there was less mention of specific ESG issues such as human rights or climate change.”
Asset owners, however, were looking more closely at impact. They “had a strong focus on climate change and often referenced human rights and diversity,” according to the report. Asset owners were also focused on fiduciary concerns but balanced that with a desire to build long-term value and maintain positive investment returns.
Sarah Bernstein, managing principal and head of sustainability at investment consultant Meketa, says these gaps are common. She believes the “reporting discrepancies may improve over time as regulators and asset owners continue to push for greater disclosure.”
Throughout the report, PRI calls on investment managers to improve the level of detail in their sustainable investing practices. Investment managers’ failure to disclose conflicts of interest or their methodology for verifying the sustainability of their investments can make it difficult to compare the robustness of a given strategy to peer funds, for example.
Maintaining and publishing a stewardship policy is one of PRI’s goals for investment managers. However, the findings showed a significant lack of detail shared across these policies. Fewer than half of managers’ stewardship policies outlined a specific approach to climate-related risks and opportunities, according to the report. This can put funds at odds with investors that have existing net-zero commitments or are aligned with the Paris Climate Accord or any of the Sustainable Development Goals on climate.
When it comes to applying their stewardship policies, only 51% of managers said they were required to take certain actions, compared to 71% of asset owners who said the same.
Almost half—49%—of asset managers also failed to report having asset-class-specific guidelines that describe how ESG incorporation is implemented in investment decisions. Fewer than half of all managers include quantitative analysis or key performance indicators related to ESG performance, and slightly more than one-third reported telling clients how they are progressing toward sustainability-outcome objectives, the report stated.
Findings like these drove Roberta Pacifico, the head of ESG Management in Brazil at multi-family office Brainvest Wealth Management, to create her own scorecard for investment managers. Pacifico and her team look at what frameworks investment managers say they are part of and rate them based on those frameworks, in addition to other ESG indicators.
“We ask a lot of specific questions about what they are doing from an investment perspective, as well as asset monitoring and reporting,” she says. It’s a lot of work, but Pacifico points out that it’s also a risk mitigation strategy. “We have to report back to our clients. You can be accused of greenwashing or poor governance, and those are significant issues.”
The PRI report showed these data likely are not being withheld from investors, but rather may not exist. According to the report, almost two-thirds of managers said they do not use scenario analysis to assess climate-related investment risks and opportunities. Despite publicly supporting investment frameworks that consider climate, like those from the Task Force on Climate-related Financial Disclosures, 37% of those managers reported conducting no scenario analysis—one of the recommendations’ key elements.
PRI said in the report it will continue evaluating investment managers to see if there are signs of improvement in these figures.