Morgan Stanley Investment Management yesterday (May 28) issued a report issued presenting many positive – but not surprising – findings about sustainable investing.

Perhaps the main 'headline' was that record numbers of asset owners are incorporating environmental, social and governance (ESG) factors into their portfolio management strategies

It is without question good that investors are taking more account of their impact on the physical and social environment. But it is hardly news; barely a week goes by now without similar research being published. In any case, it is taboo to say one is doing anything other than the right thing on ESG these days. 

What was more enlightening was the response to the question at the very end of the eight pages of survey findings*.

Asked if they were satisfied with the response of asset managers to ESG and sustainable investing, only four in 10 asset owners globally replied in the affirmative. Indeed, just 3% of overall respondents “agreed strongly” that they were satisfied (see graph below).

Larry Fink:
Double standards?

Such widespread disappointment is perhaps not surprising since some of the world’s largest asset managers stand accused of blatant hypocrisy with regard to their investment holdings.

The very largest fund house, BlackRock, recently refused to back landmark environmental resolutions at two large Australian oil companies, the Financial Times reported last week. This was despite chief executive Larry Fink promising in January to put sustainability at the heart of the $6.5 trillion firm’s investment process.

Separately, while 76% of asset managers state that they have a commitment to human rights in their policy documents, just 4% have a dedicated human rights policy, found research by charity ShareAction. The May 14 report analysed 75 of the largest asset managers, including the likes of BlackRock, State Street Global Advisors and Vanguard.

ASSET OWNERS FALL SHORT 

Still, it seems that institutional investors are even harder on themselves than on their fund managers in respect of their ESG progress, or lack of it. In the Morgan Stanley poll, just 31% of asset owners said that their organisation was, relative to its peers, “ahead of the game in implementing sustainable investing strategies”.

These findings were reflected by comments last week from the chief investment officer of Hong Kong-based insurer AIA. Mark Konyn said that both institutional investors and fund managers were to blame for the slow progress on sustainable investment.

Many asset managers only offer ESG investment products as an option, he added. “For clients who are not interested, things just carry on as they were, and the rationale is that the asset owners should stipulate that they are interested in ESG considerations.

“The time has come to push beyond that because fiduciaries do have a responsibility for their actions and investing capital responsibly that goes beyond basic instructions from asset owners,” Konyn said. “They need to step up and demonstrate that they consider this is important.”

The Morgan Stanley survey offers encouraging figures in this respect. Around six in 10 asset owners said that they envisaged a time when they would only allocate to managers “with a formal ESG approach”.

The key problem is that investors still lack standardised, good quality data by which to measure the ESG factors of the companies in their portfolios. Regulatory efforts are underway in Europe, the US and other jurisdictions to remedy this by working on rules around corporate reporting on ESG and sustainability, but that will take time. 

For now, 86% of asset owners said that they thought fund managers could help by providing relevant portfolio reporting on sustainability and ESG performance.

They should perhaps tone down their expectations. Until asset managers have access to data truly fit for that purpose, they are likely to under-deliver on their sustainability promises.

ASSET OWNERS' VIEWS ON FUND MANAGERS AND ESG
(Source: Morgan Stanley; Click for full view)

*The survey polled 110 asset owners across North America, Europe and Asia-Pacific between October 14 and December 16, 2019.