Vanguard Group's outsourced CIO clients have shown interest in ESG strategies, but many institutional investors are still on the fence, inquiring about the right investment strategy or manager for their portfolios, rather than allocating funds, said Christopher Philips, who heads the Vanguard Institutional Advisory Services group.
"We are seeing a lot of questions around ESG strategies, not as much investment, but there's a lot of (clients saying): 'I don't truly understand or know if I want it, so let me ask a lot of questions about it and then we can figure it out,' " Mr. Philips said Thursday in an interview.
"What we try to do is create a framework for a specific organization to help them truly understand is it something that's integral to their belief set, or is this something that they're curious about because their peers might be (investing), but they don't have conviction around it," he continued.
The Malvern, Pa.-based money manager had $53 billion in OCIO assets, as of Dec. 31, 2019, Mr. Philips said. The firm currently manages around $9 billion across its four ESG funds, a company spokeswoman confirmed in an email.
Vanguard Institutional Advisory Services, which works with endowment, foundation and defined benefit clients, has fielded questions that generally fall into two camps: exclusionary vs. inclusionary ESG investing, and the depth and breadth of potential screens within investment strategies, Mr. Philips said.
Investors are considering, "Do I just get rid of tobacco companies or should I focus more on finding those (companies) that are looking for ways to help people?" he said.
As for screening out certain companies with a large carbon footprint, for instance, that can potentially result in investors "excluding a lot of organizations that are tangentially related to that particular screen," Mr. Philips said.
"If you think of something like fossil fuels, for example, a very common thread of questions that we get starts with the oil producers, or the big carbon footprint (companies)," but this line of questioning eventually expands to other sectors, he added.
"Well, what about airlines? They use a ton of fossil fuels ... What about Amazon? They have a fleet of trucks out there and they're not all electric vehicles. So, you kind of start teasing out all of these different threads and you end up with, potentially, a portfolio that is hyper-concentrated in, say, technology or health care, and that might be completely at odds with their investment philosophy," Mr. Philips.
In January, Rakhi Kumar, senior managing director, and head of ESG investments and asset stewardship at State Street Global Advisors, Boston, said that institutional investors will increasingly be asking what kind of financially material information money managers are considering in their ESG processes.
"I think the biggest challenge for asset managers is going to be giving clients clearer visibility and insight on how they are thinking about ESG from a fiduciary perspective. In the U.S., investors are starting to see ESG as a fiduciary responsibility," Ms. Kumar said in a December interview.
At the time, she also said that the industry can expect additional scrutiny related to how ESG products are designed and developed, including specific ESG objectives of strategies.