How well are fiduciary managers addressing ESG issues?
02 Aug 2021
On the face of it, trustees who employ fiduciary managers should expect high levels of support and focus in addressing responsible investment issues in the management and governance of investments. Fiduciary managers have a high degree of control over a scheme’s assets and good visibility of each underlying component of an investment strategy, often down to stock level. This means that the fiduciary manager should be able to cohesively manage a scheme’s whole portfolio to achieve trustees’ responsible investment objectives.
In theory, if climate change and water scarcity are key issues for trustees then a fiduciary manager can prioritise these issues in implementing the whole portfolio; choosing strategies that better address those risks and exercising voting rights and focusing engagement with companies on those issues. Practice is unlikely to follow theory as fiduciary managers seek to standardise approaches across their client base and seek economies of scale. So how good are fiduciary managers at actually addressing ESG issues? We surveyed pension schemes with fiduciary managers to find out.
The survey focussed on three areas: ESG beliefs, implementation and reporting. The results showed that while fiduciary managers have made good progress and many appear to be equipped with an adequate ESG toolkit, they are falling short of using this toolkit to its full potential.
ESG Beliefs: While 50% of respondents believe that their fiduciary manager offered sufficient products to implement their ESG views and beliefs, the same percentage felt there is a lack of clarity around their manager’s engagement priorities. Our survey suggests that more can be done in terms of discussing and establishing ESG beliefs and making sure that engagement priorities are established.
Implementation: It’s positive that just over 60% of respondents understand who, at their fiduciary manager, is accountable for ESG and believe that their fiduciary manager has influence on stewardship. That said, on average, two out of three respondents were in the dark on what actions the fiduciary manager actually takes on their behalf. In our view, not only should there be more clarity regarding the day-to-day actions that are being taken, but fiduciary managers should make sure that, for example, voting policies are implemented cohesively across portfolios and clearly communicated to clients. At overall portfolio level, it would be detrimental to clients if two separate investment managers holding the same stock vote different ways at a company’s AGM.
Reporting on ESG: The picture is similarly mixed when it comes to the quality of a fiduciary manager’s ESG reporting. On average, 6 out of 10 respondents said the reporting provided by their fiduciary manager enables a sufficient understanding of the level of stewardship activity undertaken, but 55% stated they felt other regular ESG and carbon footprint reporting lacked focus and needed improvement. While current reporting metrics such as weighted average carbon intensity are imperfect, it’s surprising that fiduciary managers are not all routinely reporting this, given the quantifiable nature of carbon emissions. Of course, reporting will evolve over time and what’s best practice now might no longer be best practice in a few years’ time, however we would like to see reporting improve meaningfully over the next year.
In summary, the results from our ESG survey for fiduciary clients are encouraging, but they show that fiduciary managers still have a way to go before they’ve fully exploited their unique benefit of having a high degree of control and good visibility of a scheme’s portfolio. The best fiduciary managers will need to provide crystal-clear training and discussion around beliefs; to implement these views in a joined-up way; and to clearly report back on the outcome to their clients.