ESG progress ‘strong’ at firm level but improvements needed at fund level

Written by Adam Cadle

09/07/2024

All asset managers have established environmental, social and governance (ESG) policies, with around half (50%) of the funds having ESG objectives in place, research from Isio has found.

The findings from Isio’s first annual Sustainable Investment Survey found that nearly all (98%) asset managers have a dedicated sustainable investment team supporting ESG risk management and stewardship.

Meanwhile, three quarters (75%) of asset managers have set firm-level net-zero commitments, with around two thirds (65%) of firms being signatories of the UK Stewardship Code and 63% being part of the Net Zero Asset Managers initiative (NZAMI).

The survey also found that 83% have fund level ESG objectives in place, with 67% of these strategies having fund-level ESG exclusions and 67% identifying ESG-related opportunities at the fund level.

In addition, Isio found that most real assets strategies have clear ESG objectives and are creating new ways to invest in sustainable projects like renewable infrastructure, social housing and natural capital.

Indeed, 85% of these strategies identified ESG opportunities at the fund level, three quarters (75%) have fund-level ESG objectives, and 52% have fund-level ESG exclusions.

However, ESG integration was less established across passive equity and credit sub-asset classes, with 57% of passive equity strategies, 43% of public credit funds, and 12% of private credit strategies having ESG strategies, due to challenges with data accessibility.

The survey also found that ESG specialists contribute to the risk management process for the majority of funds, including all active equity strategies, 93% of real asset strategies, 88% of private credit strategies and 68% of public credit strategies.

In addition, the survey found a wide use of ESG scorecards and multiple ESG data sources for asset classes but saw room for improvement in climate modelling.

Despite 83% of the active equity strategies assessed using climate modelling to quantify fund-level climate risk exposure, the percentage of those using climate modelling was lower among the passive equity (57%), public credit (55%) and private credit (12%) strategies assessed.

Isio also found that only a minority of funds provide Task Force on Climate-Related Financial Disclosures (TFCD)-aligned climate reporting, particularly in private markets, with 16% of private credit and 11% of real assets being able to provide this level of reporting.

It also reported a “lag” in social and nature-related reporting across all asset classes, with Isio hoping that investors would increase their engagement with frameworks like the Social Factors (TSF) and the Taskforce on Nature-related Financial Disclosures (TNFD).

The survey found that asset managers are increasingly engaged with industry initiatives, with over 90% of asset managers signing up for social-related initiatives including the Taskforce on Inequality and Social-related Disclosures or the UN Principles for Responsible Investing initiative on social issues and human rights.

Additionally, asset managers have shown commitment to environmental-related initiatives, such as the TCFD and the TNFD.

Isio encouraged asset managers to engage further with evolving frameworks and standards and continue to raise the bar on sustainable investing in line with market developments and regulations.

Commenting on the survey, Isio head of sustainable investment, Cadi Thomas, said sustainable investing is “dynamic” and has evolved “significantly” over recent years, especially regarding good practice across different asset classes.

She explained that this is Isio’s first annual Sustainable Investment Survey, which shows where ESG opportunities can be seen across asset classes and how investors can seek to “green” their strategies further.

“Real assets strategies in particular offer growing opportunities to access sustainable and impact assets, with the physical nature aligning well to impact investing within areas such as renewable infrastructure, social housing and natural capital,” Thomas added.

“Within credit products, we see significant disparity between sub-asset classes, with 'buy and hold' public strategies leading the way, while funds invested in such assets as asset-backed securities, as well as private credit strategies, lagging due to challenges with data accessibility.

“We’ve seen industry-wide improvements in climate-related reporting but continue to see a lag in social and nature-related reporting across all asset classes.

“It is however encouraging to see investors increasingly engage with environmental and social frameworks, such as the TSF and the TNFD.

“We will continue to review asset managers and products on an annual basis so we can raise the bar in line with industry advancements.”

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