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More demand, more demanding: What big funds really want from their ESG managers

Last year’s savage selloff hit ESG strategies hardest, but it hasn’t hit the appetite from big institutions. Their tastes have just become more discerning, with more stringent criteria for external manager selection.

After more than a decade of growth in assets fuelled by accommodative market conditions, the ESG juggernaut slowed in 2022 in the face of steep interest rate hikes and geopolitical upheaval. Sixty three per cent of respondents to Amundi’s ESG Evolution survey suffered “ill-timed sector bets” as energy stocks raced up the benchmark, and 53 per cent are fretting the political backlash against ESG in the United States – the world’s largest fund market.

For the 158 funds managing a collective $3.1 trillion in assets surveyed, 2022 served as a tough reminder than ESG is not “an all-weather strategy, nor is it wise to have expectations that are unfeasibly high”.

But there’s a near consensus that periodic setbacks due to changes in the macro dynamic don’t have much to do with ESG itself, and 79 per cent of respondents believe that ESG factors won’t hurt performance; 53 per cent expect the share of ESG investing in their active portfolios to rise, with 49 per cent expecting similar in their passive portfolios.

  • “Even the most casual markets observer will know that 2022 was a difficult year, but despite the hit to ESG strategies, it’s encouraging to see such optimism from institutional investors,” said Amundi group chief investment officer Vincent Mortier.

    “This year’s survey reveals a positive picture and robust appetite for ESG from pension plans, and we should not underestimate the power of this group to move the needle when it comes to making an impact.”

    That doesn’t mean external managers can just waltz through the front door and expect to be awarded the chunky mandates of yesteryear. Big pension funds are becoming more discerning in their approach to ESH, and external manager selection criteria are becoming “far more stringent”. In a trend seen around the world, but which is particularly potent locally, funds want a  value-for-money fee structure (58 per cent), as well as core ESG values embedded in corporate culture (56 per cent).

    “This applies to passive funds as well as active funds,” the report says. “After all, passives are forced holders of shares in the chosen indices: they cannot divest poorly performing shares. They are the ultimate long-term investors who can only improve the quality of their beta assets via stewardship and proxy voting.”

    The active risk in ESG indices has also been rising as they target specific themes that require a higher tracking error despite the use of portfolio optimisers, and the term passive applies “less and less to ESG investing”.

    Big funds also want a track record in delivering client ESG goals (67 per cent) as well as in stewardship and proxy voting (65 per cent), and managers need to have a deep bench of talent as well (63 per cent). Putting pen to paper more often won’t hurt either, with more than half of funds looking for managers that have “widely admired thought leadership content”.

    “These more demanding sets of selection criteria have created capacity shortages: growth in ESG investing has been exponential while the creation of the required infrastructure of skills and data has been, at best, linear,” the report says.

    “Only eight per cent of asset managers are now rated as excellent, with a further 22 per cent rated good, by our survey respondents. The remaining 70 per cent are rated fair or poor. The gap reflects perceptions of widespread greenwashing that has invited intense regulatory scrutiny on both sides of the Atlantic.”

    Lachlan Maddock

    Lachlan is editor of Investor Strategy News and has extensive experience covering institutional investment.

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