ESG Investment Integration Today: More Heat than Light

ESG Is Not GIPS: Your ESG Philosophy Must Be Part of Your DNA, a report analyzing our proprietary research, will be published on March 21, and we will be discussing the report in a webinar with Pensions and Investments on March 22 .? We are sharing key insights in advance of publication. This article is part of our Future of Investments research project.

Most Managers Think They Exemplify ESG Best Practices, Whatever Those May Be: Our research results reflect the wide range of understanding and implementation of ESG approaches today. As we show in the chart below, almost half of asset manager respondents told us they believe their firms currently exemplify ESG best practices, a self-assessment many investment consultants may disagree with.??

Two-thirds of asset manager respondents in our survey say they have a good understanding of what the investment marketplace views as a strong ESG investment policy. Again, investors and consultants may beg to differ. We think this perception gap is mainly due to lack of consensus around a clear definition and measurement of what ESG investment best practices actually are today.

Investors Want Help Approaching and Understanding ESG: In our survey, fully one-third of institutional investors using an OCIO cited the availability of ESG advisory services as a “top two” factor driving their OCIO hiring decision. In another recent survey (by Callan), only 17% of institutional investors who have incorporated ESG factors into their investment process also have a specific ESG asset allocation separate from their main portfolio. This tells us that even those institutional investors who are ESG aware rely primarily on their existing asset managers to address ESG issues within their current mandates.

Perception of Greenwashing is Easy Given No Agreed-Upon ESG Standards: It is not surprising that there are significant degrees of skepticism and concern about asset manager “greenwashing”: In a recent FundFire poll, 69% of investment professionals said they believe many asset management products use ESG as a marketing gimmick but don’t actually deliver on their stated objectives. This speaks to a lack of trust where ESG claims are concerned.

ESG Is not GIPS: We believe the widespread perception of greenwashing results from confusing the following two separate issues around ESG:

• Investment industry ESG definitions and reporting standards
• Each manager’s core ESG philosophy?

Unlike GIPS, integrating ESG factors into an investment process goes right to the heart of each asset manager's investment philosophy and process. An investment manager never had to explain why and how it implemented GIPS, and was never asked what it meant by GIPS. Conversely, investment managers also never asked investors to tell them which type of GIPS compliance they wanted. With ESG integration, simply checking the ultimately-standardized boxes will not be enough.

Managers Need to Define What ESG Is For Their Firm - and Mean It: For a manager to be credible around ESG it will need to articulate its own ESG philosophy.? There will be no ‘right’ or ‘wrong’ ESG philosophy.? Over time, we expect manager ESG philosophies will run the gamut from ‘we are complying with all rules and otherwise are implementing our legacy investment philosophy’ to ‘our investment philosophy centers around driving impact in the world toward our stated ESG goals’ to everything in between.?

We will publish the full ESG Is Not GIPS report, incorporating research results from over 450 investment professionals (conducted in partnership with Pensions & Investments) on March 21.??