Asset owners need to encourage responsible investment by money managers by setting out their specific requirements for environmental, social and governance issues in their procurement processes, said a new paper published by the Principles for Responsible Investment.
The paper said that despite many asset owners making their own commitments to responsible investment, they are not following through to implementation.
Less than half of PRI asset owner signatories include specific ESG guidelines in their investment searches and hires, and in many cases these allocations also lack details on specific expectations of money managers.
PRI said there are also inconsistencies in investment practices across asset classes.
“This creates a multiplier effect throughout the investment market,” the paper said. “Weak implementation of responsible investment by individual asset owners sends signals to the investment market as a whole that responsible investment is not a priority for asset owners.”
PRI warned that this, in turn, limits investment consultant and managers’ willingness to focus on responsible investment and ESG issues in their strategies and advice.
However, the paper also considered the barriers to asset owners not effectively implementing responsible investment commitments, or taking full account of ESG issues in their own investment beliefs, governance and allocations. “Common internal challenges include board and trustee skepticism about the investment value of responsible investment; skill gaps in relation to ESG analysis and decision-making; concerns about the costs of developing the necessary processes, systems and skills; and a narrow interpretation of investment objectives,” the paper said.
Some asset owners are embedding ESG issues into investment strategies. This should be replicated across the wider investment industry, PRI said, adding that asset owners should publish investment beliefs and commitments to take account of ESG issues in investment decision-making and company and issuer engagement; engage public policymakers on issues related to sustainable development finance; and integrate sustainability factors in their consultant and money manager selection processes.
Ongoing monitoring of money managers and consultants should also reflect ESG beliefs, such as reviewing voting processes, making ESG issues a “standard agenda item at performance review meetings,” assessing how money managers encourage brokers to provide ESG research, and assessing money managers’ engagement with policymakers on ESG issues, according to the paper.