Partnership for success in ESG

Written By: David Crawford Co-Head of Institutional & Wholesale Distribution Nordea Asset Management UK

David Crawford of Nordea Asset Management UK outlines some of the factors to be considered when selecting a partner in ESG

ESG has become a widespread investment theme, and it is here to stay. With European ESG regulation now live, the majority of asset managers are offering ESG solutions, but not every player offers the same thing. Responsible investment (RI) covers a variety of investment approaches which can be implemented in a number of ways. For investors looking to move their assets in this direction, finding an asset manager with whom to partner can be invaluable, but with the vast amount of information available, how do you choose? Identifying the right partner has become increasingly difficult as participants proliferate, and since not all managers adhere to the same high standards, greenwashing (mis-labelling an asset or an investment fund as “sustainable”, “ESG” etc.) could dilute your intent, damage your reputation and impact your risk-adjusted performance.

To help you navigate through this maze, we have created a checklist of nine questions you should consider as you seek the right asset manager to be your ESG partner.

1. Do they have the required experience?
A true partnership in RI must be built on a solid foundation. Expertise in ESG cannot be acquired overnight: the learning curve is long and steep. Technology and financial resources alone are not sufficient to match experience in ESG developed over years. At the same time, the organisation must live up to its values and demonstrate sustainability in all of its actions. Only if ESG is part of its DNA can you be truly confident that there is limited reputational risk. As an investor you should take a note of the organisation’s long-term commitment and milestones within the field of RI.

2. Do their ESG products meet your needs?
Not every ESG partner can fulfill all your ESG needs, but the ability to transfer a consistent approach across multiple asset classes (making adjustments that reflect the nuances of the asset class) may indicate a tried and tested ESG process. Whether you find a partner with a deep focus or one with a wide ESG range, it’s important to ensure that their products meet your ESG standards and expectations.

3. Do they help you do your job?
Having the right solution for you is a prerequisite, but is the manager also offering the support that you need around the product(s) you have chosen? When picking your ESG partner, it is important to consider what you might need over and above the investment strategy. If a manager offers a consistent and well-articulated approach to ESG across multiple strategies, you may be able to leverage the benefit of your due diligence.

4. Can they offer you a true partnership?
While every manager offers a certain degree of transparency, and often reporting will go beyond the regulatory minimum, it is reasonable to ask whether your relationship around ESG matters can go beyond pure product-support. The move into ESG can be a steep learning curve, and it makes sense to find a partner who can help you and your team move up this curve quickly. An asset manager who has been working in the ESG area for many years will be well-positioned to work with you as you develop your ESG knowledge and may be able to offer training materials and support around the wider topic as well as the product-level support you would naturally expect.

5. Are they truly integrating ESG?
No matter what your approach to RI is, make sure that your asset manager is truly integrating ESG into their investment processes. This means incorporating all available data, ESG-related as well as financial, into portfolio management. ESG analysis should be available to everyone in the investment organisation and should be an integral part of the decision-making process. Furthermore, instead of just buying external ESG data, we believe asset managers should invest in ESG resources, make field trips and engage with companies. These measures place the responsible investor in a better position to understand and assess how a company is positioned to manage ESG opportunities and risks.

6. Do they take ownership?
Active ownership can take various forms, such as exercising voting rights as a shareholder and engaging with the investee companies through active dialogue. Some of the most used means of engagement are investor initiatives and dialogues with companies. Often it is also useful to make field trips to the areas where companies operate in order to gain valuable insight into the company. Looking beyond voting, which is an important tool for equity holders, engagement is generally regarded as one of the most effective mechanisms to reduce risks, enhance long-term returns and drive positive change. Therefore it is important to make sure your ESG partner goes out to discuss ESG matters as well as financial matters with the companies they invest in.

7. Do they collaborate?
No-one can change the world on their own. Especially in the financial markets, collaboration is critical to make meaningful change on a broad scale. There are many investor initiatives in which asset managers can join forces with others for a common good. Principles of Responsible Investment (PRI) working groups and UN backed initiatives (such as UNEP FI and Global Compact) are some of the most well-known examples of collaborations that have been able to create common practices and shift companies towards a more sustainable future. Investor-led initiatives and engagement groups across the globe have been formed on topics ranging from climate (such as the Climate Action 100+ and the Net Zero Managers Initiative) to human rights (e.g. the Corporate Human Rights Benchmark), and a manager’s commitment to such initiatives surely reflects their commitment to a topic and ability to bring about change.

8. Does the manager measure its ESG efforts?
While impact measurement outside its traditional home of private equity is still in its infancy, primarily due to lack of data, there are other ways a manager can monitor its ESG efforts. A rigorously-applied approach to ESG should include internal monitoring of processes and, where available, regular qualitative and quantitative monitoring and reporting of outcome.

9. Are they transparent?
In order for ESG activities to be credible, they must be demonstrated and disclosed. Examples of useful ESG reporting are annual reports, PRI transparency reports, voting statistics as well as reports on corporate engagement activities.

10. Do they deliver returns and responsibility?
Above all, ESG should not mean giving up returns! A bad product wrapped in an ESG cover is still a bad product. So, when choosing the right ESG partner make sure their offering delivers the required returns while meeting your responsible investment needs.

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