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Four ways fund managers can excel at Responsible Investment in 2023

Four ways fund managers can excel at Responsible Investment in 2023

As the ESG regulatory landscape evolves dramatically, here are some essential tips for investment firms to ensure they are doing a consistently high-quality job as a responsible investor.

December 31, 2022

2022 was a busy year on the ESG regulatory front, to say the least. Investment firms in the UK, Europe, and beyond have been grappling with the major changes being introduced by policymakers to try to bring some order to the explosion of activity in the responsible investment space. To mention just a few, there were developments to the EU Taxonomy, EU SFDR, the application of TCFD requirements, and the proposed FCA SDR (we’ll spare you any more acronyms).

It seems the main objective of these new rules is to ensure that funds claiming to be integrating ESG are reporting on and reflecting what they actually do in a truthful and proportionate way – essentially a guard against greenwashing. Yet there’s still a lot of debate about the effectiveness of these policies and the practicalities of implementing them – debates that will no doubt continue into 2023. So as an investment manager, how do you overcome all this uncertainty and deliver the best job that you can for your company, and for your clients?

Here are some essential tips to ensure you are doing a consistently high-quality job as a responsible investor. They should apply whatever regulatory regime, or future regulatory changes, you face.

1. Get confident with ESG analysis

As a fund manager, you’re likely to have access to a wide variety of resources to help you integrate ESG factors into your decision-making. There are dozens of ESG ratings providers with variations in their methodologies, and there are proxy voting research platforms, think tanks, broker reports, and news providers. ESG and stewardship analysis from internal and/or outsourced resources must also be factored in.

It's great to have so much information at your fingertips; the challenge is harnessing it to ensure it helps you enhance your decision-making.

So what should you do?

  • Ensure high-quality ESG data inputs: When it comes to ESG data and ratings, spend some time getting to understand the methodology of your provider(s). Do they help to close those information gaps well enough? Do you need to combine a variety of providers to get a broader view of ESG risks? How important are those risks to your portfolio composition and have you considered how to reflect them appropriately in portfolio weightings? What about future risks – are they being captured in a meaningful way? ESG data is notoriously inconsistent across providers - so overlay it with your own research where possible.
  • Look ahead at emerging sustainability risks and opportunities: Are you spending enough time understanding key themes, topics, and trends that may affect how companies operate over time? Investors, activists and public bodies frequently discuss and consult on topics that are not on everyone’s radar now but may become significant in the future. Climate change risk was one such example before it was more widely understood and factored-in. Biodiversity loss, microplastics, and food-related health issues are other examples that are only now gaining more widespread attention as investment risks.
  • Spend time with your in-house ESG team: If not, you could be missing out on some golden insights (more on that below).

2. Capitalise on your shared insights

One of the biggest missed opportunities at asset management firms is the inefficiency of information flows between investment and ESG teams. This perpetuates a sub-optimal integration of ESG. 

Fund managers talk to companies in-depth about their strategy, financials, risks and opportunities (including ESG in many cases). ESG teams assess and engage with companies, regulators, and other investors on issues that matter now and may become systemic risks in the future. Some fund managers do both, and so, more rarely, do a few ESG teams.

Bringing those perspectives together is when the magic really happens. Break the silos and get breakthrough insights.

Centralising those key insights, interactions, engagement progress, as well as data from multiple sources means having everything in one place. This will become the logical next step for organisations wanting to work better, more collaboratively, and to gain a competitive advantage in this new normal of investing.

This is exactly why the Impactive platform was created. Book a demo and we’ll show you how it can help you.

3. Get more involved in stewardship

The quality of stewardship activity is becoming a key indicator of how seriously investment firms take responsible investment. We are seeing an increase in companies committing to higher standards of stewardship. One such manifestation has been through becoming signatories of the FRC’s UK Stewardship Code, and other equivalent codes further afield. As of September 2022, the total number of signatories of the UK Stewardship Code reached 236 investment firms with assets under management of £40.7tn, up from £33.3tn in the previous period [1].

At many investment firms, stewardship activities tend to be allocated to the in-house or outsourced ESG resources. Understandably, there’s a lot of planning involved in stewardship work, and there is a certain level of expertise needed to influence changes in corporate behaviours and policy. However, fund managers themselves can hold immense clout in engagement with investee companies. Fund managers have a deep understanding of companies, industries, and macro factors. By articulating how ESG risks and opportunities are relevant from an investment perspective, engagement gains greater credibility and is more likely to influence key decision-makers. 

4. Overcome inertia and get organised

Fund managers: we know you are busy people and the last thing you want to do is change the way you work, especially when it comes to which systems you use. But using the right system will pay dividends in the long run as asset owners, regulators and other stakeholders crank up their expectations of investment firms.

Corporate and public policy engagement can take time. The best thing you can do is to be very specific about what outcomes you are seeking from your engagements. Ensure you are consistently tracking progress against your objectives. In a 2022 Redington survey of 122 global asset managers, of the 73% of asset managers that said they engage with holdings at the strategy level, only half track and report this activity. This is surprising given the increased expectation to report on these by asset owners and policy makers.

So, make 2023 the year you stop relying on spreadsheets, scattered files, notes, and ineffective tools. Instead, start using a purpose-made system to manage all of your responsible investment work: keep clean, consistent records of your company interactions, engagements, investment notes, data and research in a centralised workspace where this information can live, grow and tell a story to your clients.

Wrapping this up…

We hope by now you have a good idea of what you need to be doing to more confidently navigate the important and constantly evolving area of responsible investment.

If you have any questions or comments, we’d love to hear from you! Get in touch with us at info@impactive.pro

Impactive is the first digital workspace designed to bring investment, ESG and reporting teams together seamlessly. Book your 30-minute demo here to see how it can transform how you work.

[1] Iasplus

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