Taking 'responsibility' seriously

U.S. global money managers are increasingly integrating ESG considerations into their mainstream investment decisions to stay competitive in searches from big European pension and sovereign wealth funds.

“This gives (U.S. managers) an opportunity to tap into larger pools of institutional cash,” said one U.S. consulting source who requested anonymity.

European pension and sovereign wealth funds are saying they will incorporate environmental, social and governance factors into all investments. Funds that have made such declarations include the 2.6 trillion Norwegian kroner ($437 billion) Government Pension Fund-Global, Oslo; the €33.3 billion ($44.9 billion) Fonds de Reserve pour les Retraites, Paris; and the £4 billion ($6 billion) Pension Protection Fund, London.

Experts say U.S. managers generally are less interested in incorporating ESG considerations into investment processes, in large part because their U.S. institutional clients aren't pushing for these changes. Among those who are integrating ESG data, some are convinced of the performance enhancement and risk management benefits; however most are led by increasing demands from European investors.

“Whether it's beneficial from an investment perspective is still questioned (by U.S. managers) — to say the least,” said David J. Bauer, a partner at manager consultant Casey, Quirk & Associates, Darien, Conn. “It's first and foremost a client-driven issue.”

U.S. money managers are taking “first steps” into ESG integration and are about three years behind European managers, said Ran Fuchs, global head of ESG analytics at RiskMetrics Group Inc. in New York. RiskMetrics provides ESG data to research analysts at money management firms.

“There's much more skepticism in the U.S. about ESG factors impacting performance,” Mr. Fuchs said. “It's much more difficult for U.S. (managers) to compete (in Europe) because they don't have these (ESG) capabilities.”

Richard Stathers, equity analyst and head of responsible investment at Schroder Investment Management Ltd. in London, agreed. “Most RFPs (from European institutional investors) have formal questions around (ESG capabilities). There is a level of risk there (in not developing ESG capabilities).”

U.S.-based managers that have integrated ESG data into their investment decisions include T. Rowe Price Associates Inc., RCM Capital Management LLC and Russell Investments.

Not all experts believe that managers who do not incorporate ESG considerations into their investment processes will be at a disadvantage in Europe.

“We are starting to see (pension funds requiring managers to be signatories of the United Nations Principles for Responsible Investment), especially in the Nordics,” said Xavier Desmadryl, global head of socially responsible investing research at HSBC Global Asset Management Ltd. in Paris. “Will this become mainstream? It's hard to say.”

At T. Rowe Price, the use of non-financial information in its investment processes formally began in 2007. “We view it as part of the risk assessment process,” said Donna Anderson, Baltimore-based vice president and global corporate governance analyst in the firm's U.S. equity division. “The purpose is ... not so much to avoid risk. It's to understand the full complement of risks we are taking.”

Ms. Anderson said integrating ESG across strategies and asset classes is “a generational shift. The people we're hiring out of business school had (this type of focus) in business school. They don't see it as a separate discipline.”

Barbara Evans, London-based assistant vice president and sustainability research analyst at RCM, said she and other analysts at the firm look for risks and investment opportunities “that quite often the market is slow to see. ... Therefore we can have an information advantage,” she said.

Ms. Evans and other experts say that incorporating ESG into investment research hasn't been proven to boost performance. However, no studies have shown it hurt performance, either. And proponents are steadfast that ESG factors can boost returns, especially in the longer term.

Russell Investments made a commitment to infusing its investment processes — specifically manager selection in its manager-of-managers program — with ESG in September through the establishment of its sustainability council, which drives ESG-related initiatives at the firm, said Mike Clark, London-based director of relationship management and the council's chairman. However, that integration is “a multiyear task,” Mr. Clark said.

Jeff Munroe, chief investment officer at Newton Investment Management Ltd., London, said his firm was pushed years ago into integrating ESG data into its investment process by its considerable batch of charitable organization clients. Newton runs about £4 billion for U.K. charities.

But Newton wanted to boost the standards of communication with clients on ESG issues, and hired Amanda Young as SRI officer in 2008. The move to boost the visibility of ESG should help as the firm looks to grow its assets in continental Europe, Mr. Munroe said.

“In Europe, there's much more of an interest in these things, and we hadn't thought about that,” he said.