European money managers are increasingly integrating ESG factors into investment decisions as a way to manage risks and boost performance.
In contrast to thematic strategies that look to invest in companies or sectors focused on environmental, social or governance considerations (such as wind energy or an activist fund), managers are incorporating ESG data into research and security selection across asset classes in mainstream strategies.
European managers say the roots of ESG integration go back a decade or more. However, in recent years, as the quality of data has improved, managers have ratcheted up ESG efforts in response to growing demand from pension funds and consultants.
U.S. managers, on the other hand, are only beginning to look at bringing ESG factors into their investment processes. They are doing so to stay competitive in the European market, observers said, rather than because of domestic client demand (Pensions & Investments, April 5).
Xavier Desmadryl, global head of socially responsible investing research at HSBC Global Asset Management in Paris, said: “ESG problems can translate into major financial problems (for companies),” citing product recalls at Mattel Inc. in 2007 because of lead paint levels in toys sold in the U.S. as a prime example. Mattel agreed to pay $2.3 million in fines as a result of violating the federal lead paint ban, according to the U.S. Consumer Product Safety Commission.
In addition to mainstream financial criteria, “we think it's worth having an additional analytic lens to judge ESG criteria (as a way of) better understanding risk and opportunities of each potential investment,” Mr. Desmadryl said. “If we have a broader perspective, we will do a better job. It's as simple as that.”
A year of training
HSBC spent more than a year training its investment staff on use of ESG data when making investment decisions. Now, Mr. Desmadryl said, the firm is identifying expert staffers in each market in which it invests to champion ESG factors during the security selection process.
Newton, a thematic equity and bond manager, was pushed years ago into integrating ESG data into its investment process by its considerable number of charitable organization clients, said Jeff Munroe, chief investment officer in London. Newton runs about £4 billion for U.K. charities and more than £42 billion ($64.6 billion) total.
But Newton wanted to boost the standards of communication with clients on ESG issues and hired Amanda Young as SRI officer in October 2008. “We just wanted to take it up a notch” by hiring Ms. Young, Mr. Munroe said.
U.K. pension funds have been required by national law to state how they take ESG into account when investing, which puts “a lot of pressure on U.K. fund managers to demonstrate capability on that front,” said Richard Stathers, equity analyst and head of responsible investment at Schroder Investment Management, London.
ESG considerations have evolved since 2000, and “over 2009 we saw a ramp-up in activity and the development of tools … to capture (ESG research) data,” he said. New focus has especially been given to fixed-income investments, which had not been given as much attention as equities in the past.
“Within the market, the main focus has been on the equity side because, as equity owners, we have much more (power in terms of voting rights)," Mr. Stathers said. "(With bonds) you don't have the influence you have as an equity holder.”
Tough to quantify but growing for sure
Marketwide integration of ESG into mainstream strategies is somewhat difficult to quantify. A March 2009 survey by Mercer LLC of 514 equity managers from around the world found that 34% integrated ESG into their investment processes.
Most managers use third-party data providers for ESG-specific inputs. Growth at these providers, such as RiskMetrics and ASSET4, has been significant and can be a proxy for the growth of integration, data providers say.
Ran Fuchs, global head of ESG analytics at RiskMetrics Group Inc. in New York, said his firm has seen annual growth in AUM of about 20% in Europe, 15% in the U.S., and 10% in Asia in the past few years. RiskMetrics Group acquired ESG data providers Innovest Strategic Value Advisors in February 2009 and KLD Research & Analytics Inc. in November.
ASSET4's clients had grown to more than 50 by the time it was acquired by Thomson Reuters in November from about five at the end of 2006, said Christopher Greenwald, director of data content at Thomson Reuters' ASSET4 in Baar, Switzerland.