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US asset managers trail European counterparts in ESG

Less than a quarter of US asset managers are using ESG risk analysis to inform their investment decisions, and European managers are considerably out-performing their American and global counterparts in integrating sustainability considerations, a report from MSCI ESG Research has revealed.

Now in its second year, the MSCI ESG IVA Industry Report: Asset Management looked at some of the world’s biggest asset managers and evaluated them relative to their peers in managing ESG risk.

The report looked at 31 asset managers across Australia, the US, the United Kingdom, Canada, Switzerland, Japan and Sweden.

Asset managers were given between a triple C and a triple A rating, depending on their overall ESG performance. The top-ranked asset manager for ESG integration was Perpetual Ltd.

Out of the top five asset managers by market capitalisation, BlackRock was the biggest improver, moving from a BBB to an A rating. Bank of New York Mellon was downgraded from a BBB last year to a BB.

Franklin Resources, Inc. maintained its BBB rating while State Street Corp. was downgraded from a BBB to BB. T Rowe Price Group maintained its BBB rating.


A graphic presentation of asset manager’s ESG risk exposure and performance can be viewed here


The report found that, apart from BlackRock, less than 25 per cent of US asset managers undergo any ESG risk analysis, with virtually no emphasis on integration.

“US-based asset managers have largely ignored ESG risks to their portfolios, and in some cases, actively disdain it,” wrote report author and US-based MSCI analyst Matt Moscardi.

According to MSCI figures this amounted to as much as $5.2 trillion worth of assets that underwent little to no ESG risk analysis.

Moscardi and MSCI ESG client-coverage vice-president, Michael Salvatico (pictured) discussed the findings of their report this week with conexust1f.flywheelstaging.com,  noting that the methodology looked at the assets under management in the 1600 MSCI World Index.

The report will in the future take in MSCI ESG risk analysis done on companies that form part of the MSCI ACWI Index, a global equity index consisting of developed and emerging market countries.

European asset managers were much further down the track to developing investment strategies that had fully integrated ESG principles and were winning a greater share of ESG-related mandates, Moscardi said.

“I don’t think anyone has captured the holy grail, which is ESG integration where an ESG risk factor is analysed and plays an equal role in a buy/sell decision as a traditional financial metric,” he said.

“No-one was quite there yet but the European managers were well on their way to getting there, especially one or two of the private equity managers. Because it is a proprietary asset, they are much keener to analyse every risk because they are going to be holding it.”

Salvatico said the research aimed to promote asset managers, whether they are active or passive, that encouraged better ESG investment practices and, therefore, drove improved sustainability in the companies in which they invested.

While active managers could more fully integrate ESG into their decision making, Salvatico said passive managers could still be evaluated through both their engagement with companies and their use and promotion of indexes that took into consideration ESG issues.

“ESG is not just about ethical investing anymore where you screen-out stocks, it is about identifying those stocks that have the best performance amongst the ESG issues,” Salvatico said.

The report ranked asset managers on their performance in three weighted areas, with responsible investment practices making up 50 per cent, human capital development 30 per cent, and privacy and data security 20 per cent.

Within the responsible investing category asset managers were evaluated based on their risk exposure and risk management.

Risk management was broken into four sub-categories: ESG integration, ESG opportunity, engagement strategies and ESG investment controversy.

ESG integration was measured both by the percentage of assets that had undergone ESG-risk analysis and the ESG risk staffing and training.

ESG opportunities looked at the product offerings or portfolio holdings that took advantage of ESG market opportunities.

Asset managers were evaluated on their proxy voting policy and inclusion of ESG or portfolio corporate engagement strategies to mitigate ESG risk. An asset manager’s track record for investment-related controversies was also analysed.

The methodology MSCI developed looked at risk exposure by evaluating the types of ESG risk embedded in each asset manager’s investment strategies and matching them to a set of ESG management best practices. There were different best-practice criteria for both passive and active managers.

Moscardi said its assets-at-risk model focused on two distinct categories of risk for asset managers’ clients: asset class and market.

Asset class looked at the inherent risks in an asset class such as illiquidity in private equity, which may increase an investor’s exposure to regulatory or environmental risk.

The market risk looked at the overall risk on a range of factors such as financial stability, environment regulation, governance and political government risks and geographical constraints such as weather and natural disasters.

Each asset manager’s ESG strategy was evaluated relative to the investment risk they faced.


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