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August 2, 2022updated 10 Aug 2022 11:40am

ESG initiatives: Asset owners must sharpen their teeth

If we are to see any meaningful impact from ESG engagement, asset owners need take ESG initiatives they sign up to seriously.

By Daniel Flatt

ESG initiatives
A warning: Asset owners need to make clear what will happen if they or their fund managers fail to treat ESG initiatives seriously. (Photo by James Gritz via iStock)
  • Asset managers have, on average, signed up to 24 ESG-linked public initiatives.
  • Climate Action 100+ is the third most popular among them but is failing in its mandate.
  • Relying on exclusion from an initiative is not enough to spur definite action.

It should be reasonable to assume that by signing up to an ESG-linked initiative, then the institution signing up to it must be fully committed to the principles it ascribes to.

But we know this is not always the case.

In May, HSBC Asset Management was caught short when its former head of responsible investment, Stuart Kirk, declared publicly that he believed climate risk is not something investors should overly concern themselves with. This comment directly contradicted the asset manager’s own climate policy report and multiple initiatives it is signed up to, including the very influential Task Force on Climate-Related Financial Disclosure or TCFD.

As Capital Monitor revealed in July, the argument this was the behaviour of a lone wolf was dealt a further blow when we discovered Kirk had been airing such views well before Cop26 last year.

As we have argued before, it’s not that senior investors hold different views on climate and financial risk that is so troubling – it’s when those views directly contradict the formal pledges they have signed up to that it matters. If your top executives don’t believe in it, don’t sign up to it.

Based on Capital Monitor analysis of the top 100 largest fund managers by AUM, 90 have signed up to at least one formal ESG-linked commitment or initiative, with the UN Principles of Responsible Investment (PRI) being the most popular.

In fact, on average, each asset manager is signed up to 24 ESG-linked public initiatives. That’s a lot of commitments, voluntary or otherwise, and should be a cause for celebration but also for concern.

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Climate engagement: a damp squib

Take Climate Action 100+, the third most popular initiative by number of signatories. For an initiative boasting 700 investors, responsible for over $68trn in AUM, and whose sole purpose is to collectively engage with the world’s “largest corporate greenhouse gas emitters”, ShareAction, a non-profit organisation focused on investor engagement, is underwhelmed by its progress to date.

The overall lack of reporting on engagement policy by investors implies many are not living up to the initiative’s aims. Of 60 signatories ShareAction analysed (many of them the largest by AUM), 37% hadn’t even bothered to specify climate change as an engagement priority, according to research published in May.

Worse still, 82% had not specified objectives for climate change engagement, while the same proportion were not reporting on what would happen if engagement failed to trigger a change with the investee.

In short, ShareAction paints a picture of an initiative failing in its primary purpose: to enact change.

These findings also raise the question of how many other similar initiatives are facing the same challenges. Many investors privately acknowledge the “brand” benefit of signing up to them, knowing full well they don’t yet have the capacity to act on principles they’re putting their name to. This is presumably why so many similar initiatives to date are voluntary and don’t set hard and fast requirements.

More than a threat

So, what sort of threats are in place to keep them honest?

Not much, it seems. Some initiatives, such as the PRI, will expel those who fail to engage in any way with what they signed up for. ESG analysts Capital Monitor spoke to said this threat is a compelling reason for many to stay on point; the reputational hit is not worth the risk.

But, given the high stakes, is this really enough? As far as Capital Monitor is concerned, a more formal mechanism for penalty is required.

The buy-side – asset owners (such as pension schemes, insurance companies, and high net-worth individuals) and corporate CFOs and treasurers – should assert what value they place on being part of such initiatives. Specifically, they must state that they are more likely to do business with institutions that are signed up to initiatives they value and categorically exclude those that have been expelled.

In doing so, it delivers a clear message they take their own public commitments seriously. As valuable clients to both banks and asset managers, their say is important.

There is evidence of this happening, at least in the area of governance. For example, UK life and pension firm Scottish Widows (£190bn AUM) in July gave asset managers a deadline of 2024 to sign up to the UK Stewardship Code – which hopes to encourage more active monitoring of governance practices – or risk losing business. Such statements of intent have a way of focusing minds.

But herein lies the rub. The onus sits squarely on the buy side to live up to their pledges. If ShareAction’s observations of Climate Action 100+ are anything to go by, then they also have some distance to travel. It simply isn’t enough to sign up to an initiative and assume anything meaningful will come from it.

If asset owners can’t get themselves together and take ESG engagement seriously, they can hardly expect the sell-side to do so.

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