Money managers diverge regionally on ESG approach

While the increased politicization of ESG in the U.S. has some money managers revisiting their communications playbooks, the reality in terms of ESG assets under management is far less dramatic.

In fact, according to Pensions & Investments data as of Dec. 31, ESG assets fared slightly better than total worldwide assets under management, which dipped 16.6% to $77.45 trillion from $92.83 trillion in 2021. That compares with a 16% dip for assets managed under ESG principles, to $19.87 trillion.

The contrast is starker over the past five years. While worldwide money manager AUM grew 14.6% over that period, those managed under ESG principles zoomed 198.1%. And for the 25 largest money managers of ESG mandates, the 2022 dip of less than 1% was barely a blip in terms of mandates that topped $3 trillion for another year.

Some of those top 25 managers experienced dramatic growth last year in ESG mandates, while others saw single- and double-digit declines from 2021.

Despite being a popular target for ESG critics, BlackRock had 15.1% growth in ESG mandates that reached $586.5 billion by the end of 2022. Private asset manager PineBridge Investments LLC in New York also had a good year, with ESG mandates increasing 46.3% to $26.9 billion. London-based Schroders PLC, where the broader ESG principles category dipped 14.6% to $712 billion, the ESG mandates had a 511% increase to $66 billion. Aviva Investors also saw a huge jump of 442% in mandates to total $98 billion as of Dec. 31.

Assets managed under ESG principles increased nearly 90% to reach $570.6 billion at New York Life Investments. The jump was mainly due to one boutique classifying assets as ones managed under ESG principles following changes made in 2022.

Longtime ESG proponent Legal & General Investment Management saw ESG assets and mandates increase 2.3% to reach $401.3 billion, and 95% of its new product launches last year were ESG-related, said Laura Brown, head of client and sustainability solutions for LGIM in London. Driven by institutional investor interest, solutions to address climate change, biodiversity and other sustainable development goals "continue to grow in clients' portfolios," she said.

Now, as institutional investors have gotten comfortable with ESG integration and metrics, "clients are looking to have real world impact," Ms. Brown said.

Morgan Stanley Investment Management had less pleasant news for assets under ESG principles, which declined 56.3% to $211.2 billion in 2022, but ESG mandates were relatively better, declining 18.6% to reach $39.6 billion. MSIM attributed the drop to a switch in 2022 to a more conservative category with objective criteria, including binding ESG negative screening.

BNP Paribas Asset Management saw its ESG mandates dip 22.7% to $73.5 billion in 2022 while assets under ESG principles dropped 36.6% to $328.3 billion.

A BNP Paribas spokesman said that some primary reasons for the decline were the outperformance last year of energy, aerospace and defense stocks, where ESG portfolios tend to be underweight, and a rally in value stocks, while many ESG solutions providers tend to be more growth-oriented. "This is borne out by the underperformance of ESG indices relative to broader indices," he said.

"This year, as the U.S. moves towards a recession — a recession that we believe is necessary for inflation to revert to the Fed's 2% target — we would anticipate growth stocks to outperform value stocks. In a recession, growth is all the more desirable and, at least on a relative basis, growth-style stocks should be able to provide it," the spokesman said.

Between recession fears and a rapidly approaching U.S. election season, 2023 could see even wider divergence between money manager operations in the U.S. and elsewhere, and plenty of mixed messages.

A biennial global asset management survey of investor sentiment released June 7 by Linedata, a global provider of asset management software, data and services, found some North American managers now deprioritizing ESG integration. While 33% of them considered it a high priority in 2021, only 22% did so in 2023. "North America was the biggest swing, and you can easily chalk it up to the political environment that is out there today," said Bob Moitoso, Holmdel, N.J.-based head of asset management, North America at Linedata.

By contrast, the global survey of 265 buy-side institutions including asset managers and wealth managers found that worldwide, more of them consider ESG a high priority, 40%, compared to 37% in 2021, "but it's only grown in one place — Europe," where it went to 63% from 41% two year ago, Mr. Moitoso said. For Asia-Pacific managers, ESG as a high priority dipped to 32% from 39% in 2021, the survey found.

"Regardless of whether you are deprioritizing it, it's out there. It's just been slowed down mostly for the political reasons. The market also has been a bit shaky so there might be other priorities," he said.

"Underneath it all, the asset managers still need to provide ESG offerings to their clients, and they still need to have reporting and data," he said. Linedata's latest survey found that 46% of firms expect ESG data management demands to intensify, driven in part by climate and fund disclosure rules from the Securities and Exchange Commission, which are still being finalized.

"The toothpaste is out of the tube. It's further out of the tube in Europe. You can't put it back in," Mr. Moitoso said.

Another 2023 survey released in March by Robeco also found investors regionally divided by the politics of ESG, with 47% of investors in North America concerned about the impact of ESG politicization on their investment plans, compared with 30% in Europe.

By contrast, European and Asia-Pacific investors at 63% and 57%, respectively, were more concerned about political pressure for failing to act on ESG and climate issues, according to the survey of 300 large institutional and wholesale investors with a collective $27.4 trillion in assets under management.

Despite the politics of ESG in the U.S., "the promotion and disclosure of ESG considerations has not changed in the Schroders strategies," said Marina Severinovsky, New York-based head of sustainability North America for Schroders.

"We believe that both regulators, and clients who have a variety of views and objectives, are becoming quite attuned to how managers position themselves on these issues. Between the buzzwords of both 'greenwashing' and 'greenhushing' we believe that what our key stakeholders expect of us is transparency and consistency," she said.

Greenwashing represents concerns that firms' marketing of ESG products and strategies is not followed through in practice, and the potential for abuse has attracted regulators in numerous countries to address it.

The more recent phenomenon of greenhushing is the opposite: Asset managers use science-based targets and other ESG criteria, but talk about it as little as possible and disclose only what is required by regulation.

ESG integration is critical across all asset classes, "and represents a higher standard of investment due diligence that includes the risks and opportunities," a message that is communicated consistently and globally, "irrespective of any fluctuations in market or political sentiment," Ms. Severinovsky said.

For Schroders, which uses an internal sustainability taxonomy ranging from ESG integration of most of the firm's assets to categories of sustainable driven, sustainable thematic and impact driven, "we ensure that our clients are well aware of these efforts, which are made with the intention to mitigate risk and deliver more durable investment returns," Ms. Severinovsky said.

The U.S. drama does not seem to be slowing down regulators and policymakers.

The U.S. Department of Labor finalized a rule last year, which went into effect Jan. 30, that allows ERISA fiduciaries to consider ESG factors.

On June 1, the European Parliament approved draft legislation that would create a corporate sustainability due diligence directive holding companies with 1,000 or more employees to higher human rights and environmental standards. As proposed, the directive would apply to financial institutions and require asset managers to do due diligence and engage with the companies they hold to minimize impacts.

This September is expected to bring a global framework from the Taskforce on Nature-related Financial Disclosures for companies to manage and disclose their nature-related risks.

While not mandatory, the framework is considered the biodiversity counterpart to the now-prevalent Task Force on Climate-related Financial Disclosures standards to assess and report on the portfolio risks of climate change. It is also expected to spur more ambitious investments addressing biodiversity challenges.

By the end of 2023, global sustainability disclosure standards to help investors understand how a company connects sustainability and value will be finalized by the International Sustainability Standards Board, and Japan is working on standards consistent with ISSB that are expected by spring 2025.