ESG Investment Content for the Asset Management Industry Survey and Best Practices

IntroductionAsset managers are putting the money where their clients’ mouths are, at least when it comes to environmental, social and governance (ESG) issues. A recent CFA Institute survey1 of portfolio managers and research analysts showed that fully 73% of respondents say they are considering ESG issues in investment activities – both to manage risk and because their clients demand it.But in writing about ESG investments, asset managers still have room to grow. New research we’ve undertaken here at Copylab reveals that the asset-management industry is keen to be heard, but is still searching for its voice.

Our study analysed the ESG content produced by 23 leading asset managers. These include some of the largest industry players in the UK, Europe and the US, but also a selection of smaller firms. Though most asset managers surveyed are generalists, our list includes a few sustainability-themed investment houses. Collectively, our sample represents over US$11 trillion in assets under management. Among the asset managers surveyed are the following:

For each of the asset managers surveyed, we dug up and dissected all relevant articles, blog posts and research papers featured on the firm’s website and produced from the beginning of the year to the end of October 2017. Additionally, we analysed all these asset managers’ ESG webpages.

Deutsche AM Schroders Standard Life Investments Impax AM

JP Morgan AM Natixis IM PIMCO Amundi AM

Newton IM Goldman Sachs AM Aberdeen AM Legal & General IM

Hermes IM Royal London AM Investec AM Aegon AM

1 “Environmental, Social and Governance (ESG) Survey”, CFA Institute (2017).

Along with ESG, responsible investing, socially responsible investing (SRI) and stewardship are all terms asset managers use to describe investment activity that considers non-financial factors relating to a company’s broader impact on society. Though these terms don’t all mean the same thing, asset managers often use them interchangeably.

The Principles of Responsible Investment (the PRI),2 define responsible investment as follows:

“an approach to investing that aims to incorporate environmental, social and governance (ESG) factors into investment decisions, to better manage risk and generate sustainable, long-term returns.”

SRI, they add, differs in that it “seeks to combine financial return with a moral or ethical return.”

As for stewardship, independent definitions tend to be vague. The UK Stewardship Code3 avoids defining the term, instead choosing to cite its associated qualities:

“Stewardship aims to promote the long term success of companies in such a way that the ultimate providers of capital also prosper. Effective stewardship benefits companies, investors and the economy as a whole.”

Agreeing on terms is the first step in establishing widespread conversation. As the Oxford English Dictionary attests, it’s those conversing who ultimately determine which terms endure. The hundreds of documents, articles and webpages we surveyed show that the asset-management industry – along with its clients – has embraced ESG as its go-to term.

A NOTE ON TERMINOLOGY

2 “What is Responsible Investment”, PRI. www. unpri.org/about/what-is-responsible-investment.3 “The UK Stewardship Code”, Financial Reporting Council (2012).

ESG: Telling vs. ShowingWe first reviewed what asset managers say about their ESG work, in terms of four core messages:

Is ESG important to investment activity?

COMMITMENT

What are the asset manager’s ESG investment principles?

POLICY

How are ESG issues incorporated into the investment process?

PROCESS

Which expert teams or automated systems are in place to carry out ESG-related work?

CAPABILITIES

How are asset managers evidencing their claims about integrating ESG practices into the investment process?

Firstly, on behalf of their clients, asset managers can exercise voting rights with company resolutions requiring shareholder approval. Many asset managers view this as a key tool to nudge companies into better ESG practices, and report their voting activity. Secondly, some asset managers also offer ESG-themed strategies. Finally, asset managers can feature thought-leadership content on ESG topics that relate to their investment activity.

In our sample, only 61% of asset managers provided regular reporting of their proxy voting. Our findings are in line with a survey of 40 European asset managers from earlier this year,4 which found that 70% of asset managers surveyed publicly disclosed their voting decisions – but only 20% revealed why they voted as they did.

When it comes to specialist portfolios, 30% of the generalist investors surveyed provided some information on ESG-themed portfolios. Several houses managing relevant portfolios (such as sustainability- or social- themed funds) omitted these products from their ESG page.

This decision can be argued both ways. Pushing a specialist product can boost messages related to commitment and capabilities, but singling out specific portfolios might undermine the message that ESG is embedded throughout a firm’s offerings. On its ESG page, Goldman Sachs AM presents a great middle-ground example by providing case studies of tailored segregated mandates.

Most commonly, a commitment declaration would appear directly on the ESG webpage. But information on policy, process and capabilities was more likely to be tucked away in a downloadable PDF file (we made sure to read them all).

For the purposes of our study, simply stating there was a policy, process or team in place didn’t count; we looked for additional detail. Naturally, the level of detail varied: for each of the core messages, coverage ranged from a single paragraph to an entire document. On policy, for example, an investment house may have chosen to exclude certain companies, to explain its proxy voting guidelines on ESG issues, or to sign up for one or more responsible-investment protocols. Some asset managers do all this and more, but for our study, it sufficed to explicitly discuss just one of the above.

Only 30% of asset managers surveyed provided information on all four core messages. Strikingly, nearly all the asset managers in the study expressed a commitment to incorporate ESG issues into the investment process, but only half of them evidenced their capabilities to do so.

Asset Managers Providing Information on the Core Messages

Commitment

91%Policy

83%Process

70%Capabilities

52%

4 “Lifting the Lid: Responsible Investment Performance of European Asset Managers”, ShareAction (2017).

Compared with running a themed fund or regularly reporting on proxy voting, writing thought-leadership articles is relatively inexpensive. So it’s surprising that only 55% of sampled firms presented any sort of content on their ESG pages that didn’t focus exclusively on the asset manager, its products or its services.

It’s not that content aimed at engaging clients doesn’t exist: 80% of the sampled firms have published relevant content elsewhere on their website this year, without making it available on their ESG page.

Source: Global Sustainable Investment Review 2016

5 “Global Sustainable Investment Review”, Global Sustainable Investment Alliance (2016).

However, the numbers suggest that investment houses would be well advised not to make specialist products a core focus. According to the Global Sustainable Investment Alliance,5 $22.9 trillion was invested in SRI strategies globally in 2016. But a closer look at the data reveals that specialist products constituted a tiny part of this sum.

SRI Assets by Strategy and Region

The Four Gaps in ESG Thought LeadershipOur analysis classified each article in one of the following four categories:

An easy way to tell the difference between a Level 3 and a Level 4 article is to consider whether the article could have been plausibly published by a policy think tank. That is, while both a think tank and an investment house can research and discuss an issue (Level 3), investment firms are typically far better equipped to imbue it with an investment angle (Level 4).

For example, this year Standard Life Investments produced two different articles on the topic of impact investing. The first, published in May in PDF format, looks at embracing the UN’s Sustainable Development Goals in mainstream investment, and illustrates its arguments using a concrete stock example. The second, published in October, is entirely generic. So, despite the similar titles, we classify these articles differently.

1. Not enough articles link mainstream investments to ESGOn mainstream financial topics, asset managers do a good job of generating blog posts that strike a balance between educating the reader and offering investment insight.

Not so with ESG communications.

From a marketing standpoint, summarising information available on Wikipedia or making broad-stroke observations may help educate the reader, but it doesn’t speak to an asset manager’s expertise. Yet such pieces accounted for roughly a quarter of the surveyed articles.

It’s perhaps encouraging that asset managers aren’t placing great focus on niche investments, although these still feature in the marketing mix. As noted earlier, investment in specialist ESG products, though growing, remains relatively minute. Instead, the bulk of investors are interested in integrating an ESG sensibility into mainstream investments.

Level 1The article mainly focuses on the asset manager, its products or its services.

Level 2The article discusses niche investment themes (such as green bonds).

Level 3The article discusses ESG issues (such as climate change or human rights) but the investment angle is minimal.

Level 4The article has an ESG angle while relating directly to investment activity.

ESG Content by Article Type

Level 1

Level 2

Level 3

Level 4

Therefore, to generate valuable ESG content, asset managers may well be better served tackling mainstream investment issues with an ESG spin, rather than the other way around.

Here are two examples. The first, by Newton Investment Management, looks at the Financial CHOICE Act, a laxer regulatory bill aimed at replacing the Dodd-Frank Act (which was passed after the 2008 financial crash). This was a mainstream financial topic, discussed with an ESG twist focusing on governance issues. The second, by Trillium Asset Management, looks at food waste, both as an environmental issue and as an investment risk. The report even suggests discussion questions on food-waste issues that investors can put to companies.

Most articles surveyed stick to industries and companies that would, conventionally, be fairly straightforward to classify as “good” or “bad” in terms of responsible investing. But this doesn’t reflect investors’ day-to-day reality:

Do good investment candidates always have a great ESG scorecard? No. Should asset managers write about treading the path between the responsibility to generate returns and ESG commitment? Absolutely.

While investors can’t single-handedly solve this dilemma, they are surely better placed than anyone else to discuss it.

2. There’s a huge content gap on ESG engagement Asset managers are increasingly expected to use their shareholding power to nudge companies down a more sustainable path. But hardly any marketing materials make a feature of this activity.

Two in three of the asset managers surveyed periodically provide proxy voting updates, but these actions are often discussed either in broad terms or in a series of brief summaries. Most commonly, the information provided fails to offer a glimpse into the considerations that went into the judgment, or what made the vote significant to begin with.

This is a squandered opportunity. Whereas environmental and social risks play out over the longer term, governance is directly linked to company performance. Clients know all too well that the sudden departure of a CEO or news of shady accounting practices can send share prices tumbling. But the inner workings of corporate governance remain, by and large, hidden from public view.

Asset-management firms are uniquely positioned to generate insight articles based on their engagement experience. For example, in March Hermes AM published an article on cobalt mining in the Democratic Republic of the Congo. Not only did the firm contextualise the issue (as highly relevant to smartphone and electric-vehicle companies), but it also discussed its engagement experience, including the observation that companies struggle to conduct due diligence on human rights at individual mines.

Royal London stood out in its approach to communicating governance issues by making them a content focal point. The company often discusses specific votes on its blog, explaining the contested issues. The writers make it known they think that remuneration issues are a big deal, and that they’re prepared to call out companies when they think they’re not doing enough. Subtly, they use these brief blog posts to educate readers.

Whether it’s about environmental reporting or better management-remuneration practices, governance-related content should always aim to draw attention to the actual issues investors face.

3. Document for life?Much of the content made available on ESG pages is offered in PDF formats. And it’s not just the nuts-and-bolts stuff like policy and annual reports: lengthy articles are offered on the insight and research sections without any summary of their contents or the value they offer.

True, a document feels more authoritative as a well-designed PDF file. Impressive-looking reports used to signal authority, and for statement pieces, like annual reports or policy documents, this still applies. This bias towards impressive documentation was perhaps warranted when the case for ESG needed to be argued. But the deluge of online content has eroded readers’ patience; they are less likely to download lengthy documents and sift through them without knowing the effort is worth it.

In practical terms, when providing a link to in-depth research, it’s good form to add a short summary that tells people why it’s great.

Deutsche AM took this principle to the next level in March when it released a collection of reports on sustainable finance, and devoted an elaborate page on its website to the topic. The page included an overall summary along with nuggets of information drawn from each of the collection’s individual reports.

Consistency is equally important: Schroders AM, for example, uniformly introduces its research papers and reports on its insights blog, with each post featuring a short paragraph or some charts and a link for downloading the full paper. They also make sure their written posts are peppered with graphs or charts.

4. Make the most of what you’ve got!However people reach an ESG page, they read it wanting to know about the firm’s work and views. The page is marketing collateral, and accessible and engaging content helps evidence any claims an asset manager makes to expertise and capabilities.

So, whether you’re writing an article, a piece of research or a blog post, it makes sense to post a link to it on your ESG page. Our content analysis suggests that webpages grow organically as content accumulates, and habits of what to place where tend to stick. As a result, some companies’ ESG content was dispersed in as many as three separate sections of the website.

Tagging content on blogs was a second source of confusion. Many firms will label certain posts with an ESG or sustainability tag. This captures most of the environmental- and social-related content, but often neglects the governance posts.

So where does this leave us? While ESG is growing rapidly as a concern for investors, asset managers’ communications on the subject are often not keeping pace. Despite the successful examples above, no single investment house can claim to be the leading authority in the field. Our research suggests that there are gaps in ESG content, ones that well-constructed, strategic communications could fill. For asset managers looking to do this, here are our study’s seven key takeaways.

1. Review your ESG webpage: does it communicate clearly on all four core messages?

2. Does your ESG webpage feature relevant and up-to-date thought-leadership articles?

3. Where on your website is the ESG content placed? Check to see it’s easily accessible and consistently tagged.

4. If you’re making an ESG article available in PDF format, make sure you post it alongside a compelling summary.

5. Assess your ESG topic selection: is your ESG content skewed towards niche investments or “usual-suspect” sectors?

6. Engage with your ESG team to develop content from contested proxy-voting decisions.

7. Make sure each of your ESG articles features an insight that only an asset manager can confidently provide.

YOUR SEVEN KEY TAKEAWAYS

Contact UsHas our paper encouraged you to review your ESG content? Contact Ross or Stuart to learn how our editorial team can help with your content needs.

Glasgow

Ross Hunter Founder & CEOt: +44 (0) 7764 984374e: ross.hunter@copylab.co.ukStudio 102 South Block60-64 Osborne StreetGlasgow, G1 5QH

London

Stuart Grant Commercial Director t: +44 (0) 7979 590797e: stuart@copylab.co.ukScotland House58 Victoria EmbankmentLondon, EC4Y 0DS