Historically, profit and loss may have been the only measure of a successful investment strategy. These days, however, investors are increasingly considering the environmental and social impact of an investment, as well as the corporate governance of the investment structure.
Large corporate investors are naturally very attractive to fund managers. They bring large commitments – which also means they have greater influence over how the capital is invested. And, as we have seen before in the Japanese market, when the very large institutions begin adopting a particular investment policy, other investors soon follow.
The emphasis these sophisticated investors are now placing on environmental, social and governance factors – or ESG factors – is therefore having a big impact on fund managers.
Some of the key ESG factors being considered include:
A global move towards low carbon emissions. An investment portfolio company might consider how much of their energy usage comes from environmentally friendly sources. And if the investment is in the manufacturing or commodities sector, are the processes environmentally sustainable?
Diversity and inclusion – ensuring gender balance, ethnic diversity and an absence of discrimination based on age or any other social/demographic factor. Are all profiles adequately represented? Are there pay gaps? Particular attention is increasingly being paid to gender diversity on boards.
Transparency in relation to fees and charges. Fair remuneration. Anti-corruption initiatives. Clear risk governance and internal controls.
Given the climbing global standards for governance and regulation, the ability to show that strong governance is embedded throughout a structure is vital.
In terms of tax, there is increasing pressure to comply with both the letter and spirit of the law in all jurisdictions, with no aggressive tax structures. Investors should be able to demonstrate that they are fully compliant with their tax obligations in their home jurisdictions.
The simplest way to ensure ESG compliance when investing is to buy into a product that is certified as compliant, for example through its ESG index ratings. There are a number of indices, such as the MSCI ESG Indexes, that have ESG philosophies at their core. These ESG indices can be used for allocating investments – or as a useful benchmark for investors to monitor the ESG performance of fund managers.
A fund manager may also sign up to the United Nations backed Principles for Responsible Investment (PRI). PRI is a voluntary scheme following a global standard, which works to understand how ESG issues such as climate change, human rights and tax avoidance impact investments and supports its network of investor signatories in incorporating these factors into their investment and ownership decisions.
With greater investor sophistication and emphasis on ESG factors comes an increasing requirement to report on ESG metrics.
However, with no set format for ESG reporting, large volumes of data can end up being distributed – some of which may not be meaningful to the investor. Data collation on the part of the investors becomes troublesome as different managers report on different metrics. Even when it comes to similar metrics, such as carbon emissions, a small difference in reporting style may mean the investor has difficulty consolidating and comparing positions.
To improve this situation, both investors and fund managers need to be flexible in their approach.
Increasingly an industry standard is emerging. Investors now typically request ESG information from fund managers using a prescribed template, with additional requests for bespoke measures. This template approach ensures the data presented is in a format that allows automatic upload of the information – rather than requiring the data to be re-typed into their systems. It also allows the investors to compare and analyse data from many managers.
Large institutional investors tend to have a variety of investment strategies, spread across a number of gatekeepers and managers. They wish to ensure each manager is following its ESG obligations, while also seeing a clear overview of their whole investment portfolio. Once investors begin receiving data in set formats, the reports from a variety of managers can be automatically uploaded into one database. The database tools will then analyse all the data and provide meaningful reports – enabling easy monitoring of ESG compliance as well as identification of opportunities within the portfolio.
In conclusion, all of this means that there is considerable opportunity for fund managers who are able to stay ahead of the game and efficiently meet investors’ increasing ESG reporting requirements – thereby gaining access to capital from large institutions.
As senior manager Joel Speight discusses in his latest article, fund managers are increasingly outsourcing their administration requirements to expert fund administrators; with one reason key being access to technology. At Moore, our advanced data systems include solutions for ESG reporting, facilitating the delivery of meaningful data from fund managers to investors. For more information on our expertise and capabilities in this area, please get in touch.
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