The latest Responsible Investment survey from pensions advisory firm LCP reports that, although the majority of investment managers claim to be committed to investing responsibly, there is still significant room for improvement when it comes to ESG investment considerations. LCP urges investors to engage with their investment managers and challenge them over their ESG approach if what they see doesn’t match up to the managers’ marketing messages.

Evidence shows that investing responsibly will lead to better financial outcomes. Over eight out of ten investment managers who responded to our survey (85%) reported that they integrate ESG factors with the aim of improving long-term investment outcomes for their clients, whilst two-thirds (67%) said they believe ESG risks and opportunities can affect risk-adjusted returns over the short to medium term.

The number of investment managers who are not committed to systematically considering environmental, social and governance (ESG) factors as part of their investment process across all asset classes remains significant at 30%, according to the 2020 edition of LCP’s Responsible Investment survey.

Actions to address climate-related risks have remained surprisingly weak, despite them being a focus for regulators and policymakers. Of five specific actions that can be taken to manage climate-related risks, investment managers said they undertake, on average, just 1.7 per asset class. In 14% of cases, climate-related risks are not considered at all.

Significantly, engagement levels on climate-related issues remain low, with only 52% of managers giving a reasonably detailed description of their approach to engaging company management and other relevant parties on climate change. The level of engagement around other topics was even lower, with only 40% of managers giving a reasonably detailed description of their approach for boardroom roles and diversity, and only 23% for fair pay and benefits across the workforce. This is disappointing, particularly given that stewardship is in the spotlight following the EU Shareholder Rights Directive amendments and the new edition of the UK Stewardship Code.

Claire Jones, principal and head of responsible investment at LCP, commented:

“The survey results around climate change considerations are particularly worrying, especially given the widespread pressure on institutions to respond to growing demands for a faster transition to a net zero carbon economy. Climate change poses both physical and transition risks that investment managers should be taking into account.

“The lack of clear engagement policies when it comes to responding to the challenges and expectations of modern society is also concerning. Stewardship is a vital element of that response, enabling investment managers to help create long-term value for our clients and their beneficiaries, whilst simultaneously providing sustainable benefits for the economy, the environment and society.”

There is however evidence that progress has been made. Encouragingly, managers’ overall scores – on a scale from 1 (weak) to 4 (strong) – have improved on average from 2.3 to 2.6 since LCP’s 2018 survey, with almost all areas showing improvements. The vast majority of managers (88%) are now signatories to the UN-backed Principles for Responsible Investment (PRI), representing a substantial increase since 2018 (78%).

Less than one in ten respondents (8%) said that ESG integration is not an important part of their investment approach – indicative of the significant increase in focus on RI we have seen from managers, especially in the past two years.

Jones added:

“In line with the greater focus on responsible investment, it is encouraging that we have seen an uptick in managers’ overall scores. Additionally, successful implementation of the PRI principles will improve investors’ ability to meet their commitments to beneficiaries, as well as better align their investment activities with the broader interests of society.

“Despite the progress revealed by our survey, there is still some way to go, especially when addressing climate-related risks and ensuring that ESG factors are systematically considered across all asset classes.”

Notes to editors

LCP invited 148 investment managers to provide in-depth information about their approach to environmental, social and governance (ESG) factors and stewardship during August and September 2019. Responses were received from 137 managers, comprising nearly all of the major institutional investment managers in the UK. LCP assigned each manager an overall score of 1, 2, 3 or 4 based on their analysis of the responses.

LCP asked about five widely-applicable approaches to managing climate-related risks, which can be used in tandem with each other:

•  systematic consideration prior to investment at security level;
• systematic consideration prior to investment at strategy level;
• key topic for engagement; 
• risk reporting at security level; and
• risk reporting at strategy level. 

Investment managers responded separately for different asset classes for this question. The statistics quoted are calculated by asset class rather than by manager, hence a manager offering (say) two asset classes is counted twice whereas a manager offering one asset class is only counted once.​