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ESG Under Scrutiny: Lessons from Manager Selection
Environmental, social and governance considerations are increasingly important across all asset classes. Yet ESG priorities and principles varying hugely among investors, creating interesting dynamics in manager search and selection.
IN THIS PAPER
Overly simplistic ESG analysis restricts the investor’s choice. When rating or scoring managers on ESG issues, an approach that is specific to the individual investor can significantly increase the universe of providers from which that investor can choose.
Beware superficial signals. Culture, attitude and internal organisational conflicts of interest can outweigh formal processes and practices where ESG matters are concerned. Avoid giving excessive weight to outward signs of commitment.
ESG integration should not involve increased fees…in theory! That being said, the frequent need for customisation - even among investors that would prefer pooled fund structures - can add an extra layer of cost to ESG investment.
This paper looks back at recent ESG-oriented manager searches in public and private markets. Two of these - a Private Debt selection exercise for the UK Environment Agency Pension Fund and a Public Equity search for a European family office – are presented in detail. These asset classes sit at opposite ends of the spectrum in terms of the extent to which ESG has become embedded and marketed.
We hope that specific insights drawn from practical examples, as opposed to broad generalities, will be useful for both investors and managers involved in this sector. Many of these lessons relate to manager analysis, or how to dig beneath increasingly sophisticated window dressing to assess practices.
Overall, the universe of products and strategies continues to shift away from exclusions and screens, towards bottom-up factor integration and active engagement. Yet each of these approaches can take many forms. Perhaps the most fundamental takeaway is the sheer diversity of demand on ESG subjects. The same strategy and team can often satisfy one investor’s ESG requirements whilst falling short for another, making a bespoke approach important.
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