Investment consultants starting to get ESG message

89% of consultants anticipate an increase of clients’ interest in ESG matters in the next three years.

Investment consultants appear to be getting the message about the importance of environmental, social and governance (ESG) factors, if a new survey by Eurosif is anything to go by.
It found that 89% of consultants it polled anticipate an increase of clients’ interest in ESG matters in the next three years. Between September 2008 and September 2009, 64% saw an increased client interest in ESG – despite the financial crisis.
A companion survey in the US came to similar conclusions. The Pensions & Investments/Social Investment Forum survey found that 56% of consultant respondents reported increasing client interest in ESG investing in the last year – with 88% predicting growing interest in the next three years. “This isn’t a flash in the pan,” said SIF research director Meg Voorhes.
However, more needs to be done – especially at the mandate level – to counter what Eurosif calls a “split between RI and mainstream investing”. It found that 42% of RFPs include questions on RI only when they are specific RI mandates. Just 36% of consultants evaluate asset managers’ ability to incorporate ESG.
And just 33% of respondents were aware of the CFA Institute report “Environmental, Social and Governance factors at Listed Companies” Only 44% knew of the recent UNEP FI report “Fiduciary Responsibility, legaland practical aspects of integrating ESG issues into institutional investment”.
Speaking at the launch of the Eurosif findings, Environment Agency pension fund head Howard Pearce said he was shocked at this lack of awareness. He argued ESG should not be client driven but driven instead by the principles of investment risk and opportunity.
Roger Urwin, global head of investment content at consultants Watson Wyatt, said responsible investment is “subject number 10 on the agenda of most of the funds I deal with”. There was no “homogenous block” of consultants and asset managers were not getting clear cut explicit guidance from clients. Clients were asking consultants to make ESG easier for them, he said. Urwin saw a role for investment consultants in helping to facilitate ESG collaboration across funds. He told of his own ‘personal journey’ to see the importance of ESG.
One consultant, KPMG’s head of investment advisory Patrick McCoy, told Eurosif that clients find it impossible to form a view on ESG. He was quoted saying: “They only take them into account when they impact the financial performance of their investment. For example, even on the delicate issue of child labour, they do not want to form a view unless it will have an effect on the performance – they shy away from making this type of
judgement.”
The Environment Agency’s Pearce said some consultants are “missing a trick” by not signing up to the UN PRI. Neither Watson Wyatt nor KPMG are signatories unlike rivals Mercer, Hewitt, Hymans Robertson and Aon.
Eurosif found consultants are less inclined to investigate the proxy voting and engagement records of asset managers concerning ESG issues – although it points out that Watson Wyatt has developed a manager monitoring service called “Active Ownership Watch”.
Watson Wyatt’s Jane Goodland said clients assume that asset managers are doing ESG as a matter of course, which is forcing asset owners to revisit theirexpectations of their managers.
Melissa McDonald, head of responsible investment at report sponsor AXA Investment Managers, said the industry has moved on from just paying lip service to ESG. “Despite the low levels of interest in shareholder voting and engagement as revealed by the study, we believe that regulatory scrutiny combined with government pressure to adopt active ownership, will evolve the institutional investment process to encompass the breadth of ESG investment approaches in the future.”

link to Eurosif survey