PRI A+ rated asset managers: How do they do it? (Part 2)

This is the second of a two-part series. The first looked at the benefits and challenges of the PRI’s reporting and assessment process while today’s article looks at areas of improvement, the voluntary disclosure question and third-party assurance.

Speakers:
Asha Mehta, Acadian Asset Management (AAM)
Eoin Fahey, KBI Global Investors (KBI)
Jonathan Bailey, Neuberger Berman (NB)
Joshua Kendall, Insight Investment (II)
Rory Sullivan, Chronos Sustainability (CS).

1) Areas of improvement?

II: We have mentioned to the PRI recently that Liability Driven Investing (LDI), which makes up about 60-70% of our assets, should be incorporated into the survey. We think that the fixed income section can be more comprehensive. It is a larger asset class than equities, and you have a well respected Credit Ratings advisory committee with 100 signatories, all supportive of improving ESG activity amongst CRAs. In other words, there seems to be a slight disconnect between the reporting framework and what the rest of the organisation is doing. Perhaps the assessment could start looking looking at something core, like money markets – to which we have around $30bn allocated.

“One in four of all signatories got an A+ , which makes you wonder if the assessment is just a little bit lax.”

AAM: Generally, allocators find it hard to fully understand the assessment framework. It’s not because the information isn’t disclosed but it’s not readily digestible and the implications aren’t readily known. So, if an asset owner is trying to award a mandate, how do they make sense of different assessment results? Perhaps there needs to be more guidance on how to interpret a PRI score.

KBI: I think there is a danger of, and I have no great interest to be critical of the PRI, grade inflation. While there is a genuine degree of process improvement across the industry as ESG becomes mainstream, I think best practice two or three years ago is certainly not best practice today and the assessment has not kept up. It’s the Strategy and Governance portion which concerns me. According to our rough calculations for 2019, exactly one in four of all signatories got an A+ which is the absolute maximum grade you can achieve, which makes you wonder if the assessment is just a little bit lax.

NB: On the topic of engagement in equities, I think the question for the PRI is how can you push a very diverse signatory base in the most robust and ambitious way possible. If you are a single strategy boutique with a concentrated portfolio, you should be deeply, deeply engaged and so the bar should be set very high. And at the other end, you have trillion-dollar passive managers, and so what is possible for them should be taken into consideration.

CS: Reading through responses from signatories, it’s often striking how many are underutilising written portions of the assessment to tell their story in an engaging and considered way, as they would do in their firm’s own Responsible Investing or ESG report. Many submissions are poorly written, incomplete and so on. In my opinion, many are missing an opportunity to tell their story to the PRI, a key stakeholder.

2) What do you think of the voluntary disclosure of scores?

II: We disclose our ratings on our website publicly and we’ve done that for the last few years. There is a slight bias as we have done well and are quite happy to talk about it but I do think ratings need to be listed publicly. When I’ve gone out to use the portal, I found it very difficult to use. I have tried to request scores in the past but I’ve not been able to get confirmation back saying X investor approves or not.KBI: We disclose our scores and we have had one request through the data portal. I think asset managers should publicly disclose what they have received in the various sections of the assessments, not just strategy and governance, as you don’t invest in a firm but in specific products and services. The nuclear option is I suppose to simply publish all signatory scores or make it the default and signatories can choose to opt-out and of course stakeholders will draw their own conclusions from that. But to be fair to the PRI, there is a very diverse signatory base with diverse demands and there is also a sense of not making the assessment process so onerous, which I can understand.

CS: We have no particularly strong views but the argument against is that some signatories perform badly as they are new or small and they don’t have access to the resources and infrastructure. Other perform badly as their clients may not attach as much value to the assessment and are therefore not incentivised. Either way, the objective must remain to stimulate change and reward leaders; whether public disclosure can support this I don’t know.

3) Did you obtain third-party assurance for your submissions?

II: We looked at it last year but we discovered that there isn’t actually anybody who could do it so we don’t know how we would go about this. I guess you could go to one of the big four consulting firms and ask for an audit of responses but they wouldn’t necessarily have a granular understanding of responsible investment in fixed income that such a service would require.

KBI: This is certainly something we have struggled with over the past three years or so. We have actually talked to a few accountancy firms and discovered that it would be difficult and very costly. We don’t think this is something that our competitors do, so all in all we have decided not to seek external assurance but over time this will become more important. As of now I don’t think the expertise is really there.

NB: We assure meaningful portions of our submissions through our internal audit team as we do on all key ESG KPIs {key performance indicators]. For example, we report on the proportion of assets under management which are ESG-integrated and all of this has been reviewed and challenged internally. We’ve not done external assurance partly because our clients have not told us that this is needed and we often share our assessment submissions with them so they can do their own digging.

4) Would you like to flag anything else?

II: I am not sure that signatories are segregating ESG-labelled funds when responding to the assessment, meaning that signatories may be referring to a small subset of ESG funds when describing how they integrate ESG rather than their entire investment process. We believe there is a risk that the surveys might be answered with the former in mind. (This specific concern was also shared by KBI). As a firm, we integrate ESG into everything we do but we go much further for our ESG-labelled funds We would also appreciate, over time, being able to report specifically on these funds.

KBI: We would like to see a comprehensive data analysis report on scoring results, such as areas in which scores are improving or deteriorating. Maybe they do this already but we have requested score data before and they haven’t really been able to give me anything. There is some information which is kind of buried in the website, but I think it would be good publicity for the PRI to produce some kind of statistics on assessment results.

II: Last year, we found one of the questions slightly vague and as a result did not manage to answer correctly. This resulted in our Strategy and Governance rating falling to an A and we were stuck with it for the whole year. If an honest mistake was made, we think there should be recourse for signatories but unfortunately this has not been the case.