Executive summary:
- The 2023 Russell Investments’ Manager ESG Survey covers ESG commitments, challenges, and reporting, Net Zero target setting, active ownership, and diversity.
- Key challenges for active managers include the availability of data, reporting standardization for corporates, and meeting diverse client needs.
- The findings show that commitments to responsible investing reporting frameworks and initiatives continue to rise.
On Jan. 30, Senior Director and Head of ESG and Investment Management, Kris Tomasovic Nelson, moderated an online discussion exploring the findings of Russell Investments’ 2023 Manager ESG Survey. In its ninth year, the annual survey offers valuable insights into the evolving landscape of ESG practices within the investment management industry. The 2023 survey reflects the views of 169 asset managers—a mix of equity, fixed income, real assets, and private markets asset managers. The collective assets under management (AUM) for 2023 was nearly $20 trillion, with entities ranging from firms with an AUM of less than $10 billion to those with more than $500 billion. Geographical diversity of the respondents was also evident with a significant majority based in the U.S., and with strong participation from Europe, the UK, Australia, and New Zealand.
In studio with Nelson was Yoshie Phillips, head of fixed income ESG investing. Participating from the UK was Jonathan Bailey, global head of ESG and impact investing at Neuberger Berman. The 60-minute webinar included questions from the online audience.
During the discussion, the panelists explored the survey results, including research questions such as:
- Is net-zero still a priority for managers?
- Where does climate risk fall on the list of manager and investor concerns?
- Are data and reporting improving?
- How are managers navigating the unique demands of investors?
Following are highlights of their conversation. Periodic timestamps and indications of visual slides are provided.
To start, Nelson introduced an online audience poll: What are your biggest challenges to integrating ESG, sustainable or climate-aware solutions?
The top answers were:
- Understanding the financial materiality ESG issues
- Concerns about performance impact and its data challenges, including availability
We know that no two investors consider ESG in exactly the same way. We asked our investment managers in the survey to name the biggest challenges they face in integrating ESG information, and 25% said, “serving different client needs is a real challenge.” How do you help clients understand the range of sustainable investing securities and products in the fixed income space? <5:03>
“For fixed income, it’s about objectives, process and outcome,” Phillips said. “On the fixed income side, we have multiple segments. Each application is slightly different, and the starting point is different but the overarching approach is similar. The main questions we ask are: What specific outcomes are you looking for, what is feasible, and what are the potential implications for performance?”
Briefly, our survey data suggests that climate risk remains the top client concern again this year while environmental issues was selected second. Social issues received a lower tally and diversity is an important topic in the U.S. and the UK. Climate risk and environmental issues were consistent around the globe, and pretty consistent across asset classes. Let’s dig into climate risk here. What kinds of conversations you are having with your clients on this topic? <11:07>
Bailey explained that his firm provides tools, measurement capabilities, and analytical frameworks to evaluate “how climate from both a physical and a transition perspective may impact particular securities and investments.”
He said: “One of the things we've done is to model out climate-adjusted capital markets—assumptions that can then reshape a strategic asset allocation that can be used as a bit of a sort of stress test.”
Regarding Net Zero initiatives, Bailey provided a basic definition—balancing the generation and offsetting of emissions. He discussed how companies can work to offset their emissions and also how investors can choose companies for their portfolios that are working toward Net Zero.
Even with a 2050 Net Zero target for example, Nelson added, companies need to start strategizing today to consider how they're capital allocating in order to make sure that they stay on pace with changes in the global economy.
From our survey, 30 of the managers indicated that they were already Net Zero signatories, or they were intending to sign up in the coming 12 months. Interestingly, 80% of the respondents domiciled in Europe indicated that they are already signatories and 58% in the UK said so, compared to 40% in Japan and 20% in the U.S.—so the U.S. is just beginning to embark on this conversation. How do we translate the concept of Net Zero into actual investment practice? What does that mean at the portfolio level, even from a bottom-up basis? Can you talk about that in fixed income?
“The transition to low carbon economies is happening, as Jonathan has highlighted, and on the fixed income side, it is happening too. The energy-transition-focused strategies are often seen in corporate bonds and green bond strategies,” Phillips said.
“We are seeing an increasing number of product offerings in Net Zero applications in this area, like high yield bond strategies,” she continued. “The point worth highlighting is that we talked about clients’ interest in performance implication, and Net Zero concepts in investment practice can have performance implications, especially for the short-term and depending on which market segment you are applying.”
Some Net Zero strategies might exclude some energy companies in order to achieve specific emissions goals in the portfolio. Obviously, that's a decision that we think needs to be taken with care. Certainly, if clients want to implement that, we can do that for them. It does have implications for exposure and for risk return and it is doable but with a strategy and guidance.
Nelson shared survey results regarding transparency and data. For example, she said, the survey showed that equity managers are a little more transparent than other types of managers, but overall transparency is increasing. Also, year-over-year survey results suggested that there has been an increase in diversity on boards.
According to the survey, clients and regulators are asking for increasing transparency around ESG and sustainable investing, and a higher proportion of managers this year indicated that they are reporting ESG metrics for all funds. At the same time, survey results showed an increase in the percentage of participants saying that they do not provide any ESG-related reporting.
Phillips added that managers seem more willing to share on an individual basis rather than in a public forum. “We believe that open transparency is a viable step toward diversity, equity, and inclusion practices,” she added.
As the discussion turned to data, Bailey referred to historical data related to cruise ship activity or aircraft emissions, for example and provided the explanation that many different data points and judgement work together to help provide a more complete picture. <42:01>
“If you just build a portfolio based on carbon emissions alone, you're using backward data that’s got patchy disclosure and you may miss the most significant portion,” he said. “Is carbon emission data important? Yes, absolutely. We should engage with companies and ask for it. Regulators are requiring that to be disclosed, but it can't be the only part of the puzzle.”
When we asked managers about their information sources, they seemed to be increasingly emphasizing proprietary and direct research. Our survey showed that direct company engagement became the primary ESG info source, cited by 25% of the respondents. More disclosures are prompting more managers to seek context.
Regarding stewardship in fixed income, Phillips added that over the past several years, the tone of the dialogue with bond issuers has expanded to include more sustainable topics, like environmental and social issues, and companies are seeking desirable outcomes.
In concluding the webinar, Nelson noted that ESG is often misunderstood and probably will be throughout the upcoming U.S. presidential election. “ESG really depends on the client and how it's implemented. It can be part of the process or it can be an outcome,” she concluded.
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