Investors increase demands for ESG on all manager hires

Institutional investors, notably in the US, are increasingly demanding that consultants integrate environmental, social and governance (ESG) into their manager evaluation process for all mandate hires. Pressure is also building on fund managers to outline their positions on major topical issues such as climate change and investment in companies linked with Sudan and Iran, even if they are not managing SRI mandates.
It follows the recent declaration by a coalition of more than forty leading US and European institutional investors, responsible for over $1.75 trillion (€1.2 trillion) in assets, to commit investment managers to report on how they are assessing climate risks in their portfolios, whether from new carbon-reducing regulations, physical impacts or competitive risks.
US public funds, including the $26bn Connecticut Retirement Pension and Trust Funds and the $40bn Maryland State Retirement and Pension System, now insist that consultants include ESG factors when evaluating prospective managers. John Chaing, California State Controller, operates a checklist for fund managers on climate risk and corporate governance issues for the investment of the state’s funds.
NYCERS, the $45bn (€33bn) New York City Employees Retirement Scheme also puts ESG questions into all mandate requests for proposals (RFPs) and is understood to have recently asked fund managers tosubmit responses to a discussion on Sudan and Iran related investments.
Meredith Miller, assistant treasurer for the policy office of the Connecticut State Treasurer, said the fund had hired Mercer for its evaluation after the consultant developed a research process to evaluate investment managers’ performance with regard to ‘active ownership practices, including proxy voting and shareholder engagement and incorporation of ESG analysis into “mainstream” investment decision making.
Mercer said institutional asset owners were increasingly interested in their managers’ tendency, capacity and ability to behave as active owners of capital and reflect the materiality of ESG in investment decisions.
Tim Gardener, global leader of Mercer’s investment consulting business, said: “In the past, it was just a small group of organizations that were interested in active ownership and ESG analysis. But there are a growing number of mainstream investors who believe these issues can have an impact on long-term investment performance.”
The trend is prompting advisory firms to start drilling down into manager capabilities in the area, such as RI Metrics, a UK-based measurement company co-founded by Will Oulton, head of the Responsible Investment unit at FTSE, which launched last year.