ESG now becoming action

Environmental, social, and governance (ESG) asset mandates by the 500 largest managers rose by 23.3% in 2018, compared to their overall assets under management (AUM) which was down 3% from the previous year, according to a report.

Research by the Thinking Ahead Institute found that assets managed according to ESG principles also increased by 17.8% in 2018 and US$8.9 billion ($13 billion) was invested in ESG principles.

The Institute’s head of research, Bob Collie, said sustainability was now an unavoidable issue and talk was becoming action.

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“There is obviously a saying-doing gap in a lot of places, but perhaps more important right now is the doing-impact gap: our ability to create a more sustainable economy lags behind the desire. The most meaningful efforts on this front are the ones focused on closing that gap,” Collie said.

“There is also a growing appreciation of the importance of culture.  Good culture does not appear by accident, and our ability to assess and adapt it is developing. There’s room for improvement here.”

The report said connecting the dots from culture to strategy, to beliefs and values, and to vision and mission had become a critical leadership challenge and opportunity.

“A stronger underlying purpose, beyond the pursuit of only growth and profit, is identified as a differentiating factor in an overcrowded industry facing a challenging environment. Client interest in sustainable investing, including voting, increased across 83% of the firms surveyed,” the research said.

Looking at the 500 largest asset managers, the report also found that most expected increased pressure in the coming years from rising regulatory activity, fee compression, and the high cost of technology.

It found 81% of fund managers stated that they had increased resources deployed to technology and big data, whilst 57% of managers surveyed said they had experienced and increase regulatory oversight.

“The regulatory burden on the industry is a symptom of a lack of trust. Rebuilding that trust means more focus on the long term. Without a clear sense of purpose, you can end up being just another one of 500 firms fighting for elbow room in an ever-more-challenging environment,” Collie said.

The top three of the largest asset managers were some of the largest passive fund providers – BlackRock ($5.9 million in AUM), Vanguard Group ($4.9 million), and State Street Global ($2.5 million).

However, the research found passive assets experienced a year-on-year AUM decrease of 3.4% in 2018.

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Good to see increasing numbers of Australian CEOs focussing on ESG. This is good news for long term investors such as those with superannuation who need companies addressing impact of climate change on company sustainability.

Fund managers should always keep in mind that there is good governance..and then there is social activism. Social activism, if not checked, can be dangerous and not in the best interests of unit holders.

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