Messaging on ESG strategies becoming critical, money managers say

Amid a continuing political backlash against the use of ESG in asset management — both as a term and as a part of the investment process itself — global money managers are taking action to fine-tune the language used in their messaging and engagement with clients and prospects.

But it's not just in the U.S. where some money managers said they are thinking carefully about how they label their processes. Increased regulation in Europe has also put a spotlight on communication, among other focuses including greenwashing. And at the center of the conversations on both sides of the Atlantic is a need to be absolutely clear about an investment strategy's aims and intentions, sources said.

"Although it's called an anti-ESG debate, if you look deeper into what it's all about, it's about transparency, disclosure and correct labeling of investment products," said Eugenia Unanyants-Jackson, global head of ESG at PGIM. "And if you look at the debate from this angle, a lot of it makes sense. The one thing I don't hear from state treasurers is that they are against ESG products … but such products have to be labeled as ESG, so anyone buying (them) knows they have not just financial return objectives, but also additional E, S and G — or all three — objectives. (They are also saying) it should be clear about the risks involved, including potential risks to performance if (the manager is) restricting the investment universe to a large extent," Unanyants-Jackson said.

Marina Severinovsky, head of sustainability-North America at Schroders, agreed that "with the increasing regulatory and client scrutiny around ESG issues, being transparent and consistent is critical. We maintain our fundamental belief that the investment discipline of considering sustainability factors, in terms of understanding the risks and opportunities to companies from the social and environmental changes taking place over the longer time horizon, is additive to portfolio outcomes," she said.

The debate is particularly strong where there may be a concern that strategies not clearly labeled as ESG "are surreptitiously pursuing ESG objectives without informing the end investors about it. That is where I think the crux of the debate is, and if it is the case, what can be done about it?" PGIM's Unanyants-Jackson said.

The so-called ESG backlash stems from efforts across some U.S. states starting last year to discourage — and in some cases prevent — public pension funds from taking ESG factors into their investment strategies. Efforts have included banning some financial companies including BlackRock from manager allocations, to passing resolutions such that plan executives cannot include ESG considerations in investment decisions.

Other U.S. plans and states are pushing for fossil-fuel divestment, and in Europe and the U.K., meanwhile, taking ESG into consideration is an accepted — if not expected — approach for managers to take.

"Most firms are thinking in more cautious terms on this given what's happened," with a specific example of the more cautious approach to the overall sustainability narrative and the decisions by some to leave the Net Zero Asset Managers initiative, said Richard Bruyere, managing partner at asset management strategy consultant Indefi.

"The priority for managers today is to be extremely specific as to exactly what they are doing and trying to achieve, and not be deceptive to clients," Bruyere added.

So, what's a global money manager to do? The answer seems to be to ensure their messaging and intentions are airtight when it comes to defining ESG and its application to strategies.

"At PGIM, we set out very clearly from the beginning that we do not see ESG as an investment philosophy, investment style or an investment product," Unanyants-Jackson said. "What we are saying is ESG is a tool, and we can use that toolkit that we have to identify material risks arising from ESG factors and potentially the opportunities that are arising from large societal trends," such as decarbonization and gender equality. The firm also has clients that want to invest in line with their values, and then PGIM is also developing capabilities for a smaller cohort of investors that want to achieve real-world impact. "Incorporating values and impact objectives may not be aligned with fiduciary considerations, so to do that, we need a mandate from the client," Unanyants-Jackson added.

But she's clear that, "when it comes to fiduciary duty, it is non-negotiable. If climate risk is a material risk for the company, we can't ignore it. If we know this is really going to potentially negatively impact the financial returns, we have to incorporate it — we do this across all strategies and major asset classes," she said.

That approach has not changed, but "there is so much scrutiny, we are looking at how we communicate about what we do on ESG. Sometimes … you think everyone understands what you mean, and then you realize that's not the case at all. So, we are refining our messaging … (we are) doing it through our website communication, publishing an ESG report, thinking very heavily about clarity of message," Unanyants-Jackson said.

Client communications, for example, include an explanation of what ESG means to PGIM.

"We are reviewing materials to make sure we are concrete, and there is as little room for interpretation — or misinterpretation — as possible," she said. "And that's not just because of the U.S.," but also because of Europe's Sustainable Finance Disclosure Regulation, which asks managers to clearly define risk and opportunities and environmental and social characteristics and preferences. PGIM has $1.27 trillion in assets under management.

Schroders hasn't changed the way executives talk to clients in terms of "consistency of messaging," Severinovsky said. "What we have done, however, is listen to our clients, and be thoughtful about bringing sustainability messages and investment solutions to them that we believe will resonate with their interests and objectives," such as research on human capital management — an important topic for U.S. investors, she said.

Just as PGIM has, Schroders has also "undertaken an effort to review marketing material, website and fund prospectuses to ensure consistency, clarity and transparency of disclosure, as well as sustainability definitions and categorizations," Severinovsky added. Those efforts have included developing both corporate and investment capabilities brochures and content on the website, which detail the firm's integrated, sustainable and impact strategies, as well as summaries of Schroders' approach to integration, tools and data, and its engagement activities.

"In light of increased attention from different stakeholders, we believe that our reporting should be more frequent and more accessible, in order to ensure that our clients have the information they need to evaluate our efforts," she added. Schroders has $923.1 billion assets under management.

Other money managers said they haven't made any changes to their approach or communications. One head of marketing and communications at a global money manager said the firm doesn't really make big, ESG-related statements, "and we have been very conscious of language we use for some time."

However, Indefi's Bruyere has seen a change in managers operating in the U.S. "In the U.S., what we tend to observe is firms trying to adopt a neutral approach toward ESG — very business-focused. This would not necessarily fly in Europe, not necessarily be enough, but that neutrality is a big bet on an ability to work across states — whether they are red or blue," he said.

One other aspect of the ESG debate "that is sometimes lost — performance is no longer here" for ESG funds, Bruyere said. "2022 was horrendous, so in a way it helps the industry because these strategies are no longer at the fore of client preoccupations and what they want to do. But it will come back. It's a balancing act, but it's not easy. We've been involved with ESG-type topics for the past 10 years, and our position has always been to encourage managers to be as transparent as possible, to be adaptive, to be open," he added.

However, managers said they are still fielding questions about ESG.

"We definitely have more clients in the U.S. who are interested in what we are doing on ESG and how we approach it and how we think about it," PGIM's Unanyants-Jackson said.

But that interest is not coming from a "negative" place, Unanyants-Jackson said, but rather, "now that this debate is going on, everyone is interested, they find time to ask questions, want examples."

Schroders' Severinovsky agreed there is growing interest in ESG, with an increase in the number of questions and the level of detail requested.

"There are also more stand-alone questionnaires and surveys we're being asked to complete. In the U.S., we find that we are receiving more in-depth questions designed to assess an investment manager's capabilities and process," she said, including questions covering the extent of ESG integration across managed assets, how the firm's dedicated sustainable investment team interacts with investment desks, training that's been provided to embed integration knowledge across the firm, and information on the internal and external ESG data sources and tools that Schroders uses. More questions are also coming in on active ownership, including on engagement tracking, measuring the success of active ownership efforts, and disclosure and reporting of the firm's voting activity, she said.

Schroders has also received questions from existing U.S. clients — particularly public pension funds — "and especially in those states where ESG has been contentious or where there has been expected or newly adopted legislation or regulation," Severinovsky said.

Requests have included to clarify "whether our ESG-integrated portfolios are strictly focused on financially material considerations around risk and opportunity, which we have been happy to confirm. We have welcomed all questions as an opportunity to ensure that clients understand our integration process, our proprietary tools, and our active ownership efforts, and how we are bringing all of our resources to bear in order to help clients' portfolios meet their long-term performance objectives," she added.