Holding consultants to account on ESG

Ensuring that investment consultants incorporate environmental, social and governance (ESG) factors into their core service provision is crucial for the next wave of responsible investment. Investment consultants are crucial – particularly for small and medium-sized asset owners – to understand the investment implications of ESG issues. As gatekeepers and a trusted source of knowledge, investment consultants’ advice is often accepted with little hesitation.

In December 2017, the PRI released the Investment consultant services review, examining the industry and its role in supporting asset owners with their growing need to manage ESG issues. Following several interviews with industry representatives and analysis of information reported to the PRI, we concluded that most consultants and their asset owner clients are failing to consider ESG issues in investment practice – despite a growing evidence base that demonstrates the financial materiality of ESG issues to portfolio value.

Investment consultants advise on trillions of dollars of assets globally. In the US, 84.1 per cent of defined contribution plan sponsors use investment consultants. The US DC pension market represents $7.7 trillion in assets (as of 2018); in the UK, investment consultants advise on pension scheme assets worth £1.6 trillion. Investment consultants also play an important role in Australia, Canada and Japan, as well as other markets around the world. Their service delivery on ESG issues has a multiplier effect throughout financial markets.

But there are myriad reasons why investment consultants need to up their game when it comes to ESG factors. The financial evidence base is strong, client demand for ESG products and advice is rising, and, perhaps most importantly, the industry is in the throes of dynamic and rapid transformation in policy and regulation.

In the EU, the spheres of financial and sustainability policy are coalescing at an accelerating pace, with sustainable finance groups elsewhere watching closely. Meanwhile, in the US, policy is less directional as each new administration sends slightly different signals. Despite this ambiguity, the Department of Labor has reaffirmed that, where material, fiduciaries should consider ESG factors.

Even as certain countries continue to drag their feet on sustainable finance policy, it has by and large only intensified in recent years – a trajectory we expect to continue. The cumulative and disruptive nature of the ever-growing catalogue of sustainability challenges we face mandates it.

Given the patchwork of international policy, investment consultants, particularly global firms, must adapt their service models to meet changing regulatory and client demands. The industry leaders will do best by being forward looking and incorporating ESG factors across services and geographies – and for their whole client base; the laggards will wait until they are forced to act, but this may be too late, and clients may be lost along the way.

What the PRI is doing

The PRI’s new Investment consultants and ESG: An asset owner guide prepares asset owners for what to expect from investment consultants, offering technical insights on what should be delivered at each step of the investment process. In every section there are questions that asset owners can ask existing or prospective investment consultants, to check that they have appropriate policies, processes, competencies and experience on ESG issues. The guide adds to a growing body of PRI asset owner resources.

Investment consultant signatories are required to report to the PRI about their responsible investment policies and implementation practices, but to foster industry-wide adoption we will be updating the Reporting Framework to reflect the new guide. Through the PRI’s Data Portal, asset owners can access reported information to compare how investment consultants fare on ESG practices.

Investment consultants should be proactive to meet this demand and indeed, the industry is a competitive one, where recognition of ESG factors is increasingly seen as table stakes.

We welcome the whole industry to get behind this message – we need to move from a world with pockets of ESG excellence, to one where ESG excellence is the norm.

Nicolaj Pedersen is senior manager, responsible investment programmes at PRI.