Asset managers are increasingly being rated by investors and investment consultants on how they approach ESG in portfolio management, according to research released Thursday by Cerulli Associates.
"Not having a sound ESG policy is not yet a deal breaker for most allocators, but it is clearly becoming more important to getting business and winning mandates," the report said.
Based on interviews with 40 asset owners, managers, consultants and others, the report, U.S. Environmental, Social and Governance Investing 2020, found that 88% of asset owners place some importance on an asset manager's ESG capabilities, while 77% of investment consultants do.
Among consultants, Cerulli found that nine of the top 10 use a formal ESG rating process or take ESG considerations into account as part of the overall manager recommendation, while 39% of institutional asset owners score investment managers based on their ESG integration approach.
The asset owners surveyed incorporate ESG considerations into their investment decisions to align them with their organizations' values, for risk mitigation, reflecting stakeholders' interest and to fulfill their fiduciary duty, the survey found.
"Allocators are evaluating asset managers' ability to judge the risk and opportunity associated with material ESG considerations and apply them to sound investment decision-making," said Cerulli director Michele Giuditta in a statement.
The top ESG issue for asset owners was asset managers' diversity and inclusion policies and practices, including metrics on racial ethnic, and gender diversity, particularly among senior leadership roles, Ms. Giuditta said. Asset managers are also being evaluated on the quality of their ESG integration approach, senior leadership accountability, datasets to inform decisions and active ownership records.
"Managers advertising their ESG capabilities need to display consistency and commitment at the firm level," she said, "demonstrating how the firm incorporates ESG criteria and providing transparency into active ownership activities — proxy voting, engagement, and shareholder resolution activities — to show alignment with the firm's stated beliefs and views."