US funds get to grips with sustainable investing

How to bridge the gap between profit and responsibility

Environmental, social and governance investment and regulation have grown exponentially in the US over the past few years, posing new challenges and opportunities for investors. How can financial institutions bridge the gap between fiduciary obligation and ESG responsibility? Can asset managers reconcile doing well with doing good?

In collaboration with Mazars, OMFIF has produced ‘ESG and US asset management: The future is now’, a wide-ranging and forward-looking report into the state of ESG considerations in US asset management.

The virtual launch event hosted by OMFIF’s Sustainable Policy Institute presented the key findings of the report, led by Senior Manager Brandon Cooperman of Mazars Group. There was also a panel discussion featuring key players in the ESG space: Head of ESG Investing at Neuberger Berman, Jonathan Bailey; Director of Sustainable Investing at BlackRock, Kaitlin Bergan; and Global Head of Funding, Treasury Market Operations at the International Finance Corporation, Flora Chao.

The report showed progress in some areas. Notably, there has been an explosion of ESG-related data, which can facilitate the embedding of financial materiality into risk and analyses. The inclusion of such data will be crucial in accounting for ESG-related risks which have largely been missed by traditional analyses until now, ultimately driving better performance.

Bergan sees BlackRock’s ESG integration strategy as part of its fiduciary obligation, as ‘ESG risk and opportunity are not yet fully captured in financial reporting methods.’ The strategy entails incorporating ESG information into investment decisions, regardless of whether a strategy has a sustainable mandate. It has been fully incorporated in the asset manager’s public and private books, a goal set by the company’s CEO in January 2020.

Neuberger Berman has also demonstrably increased the proportion of strategies and client assets that integrate ESG considerations. Bailey noted that while ESG-integrated assets totalled around 25% of Neuberger Berman’s assets under management five years ago, that number is now closer to 85% (nearly $400bn).

But ESG integration is markedly different from impact investing, or strategies which aim specifically to generate measurable positive outcomes to people and the planet. Although totalling $435bn at the end of Q3 this year, such investments still only comprise a fraction of BlackRock’s total AUM (over $9.4tn). Similarly, for Bailey, the two goals remain separate: ‘We’re looking for sources of alpha that are appropriate for the types of securities that we’re buying,’ he stated, pointing out that the portfolio of a large cap value strategy would look very different to a sustainable impact fund.

For the time being, ESG impact investing remains an activist strategy. ‘Typically when we see a client want to put money towards an ESG or sustainable strategy that has a particular outcome associated with it, they’re going at that for one of two reasons: either it’s aligning with their particular values… or they’re doing it to lean into a particular macro trend that they believe in,’ Bergman pointed out. This suggests that, at least for now, the divergence between doing good socially or environmentally and doing well on return on investments is still quite significant in the US market.

Cooperman emphasised that ESG remains a complex, multifaceted and nuanced issue. ‘What we learned is that ESG is not a one-size-fits-all proposition,’ he stated. But one thing is certain: universally, ‘clients are demanding more transparency, more trust and more products. Doing nothing is no longer enough.’

The report features chapters on the evolution of ESG approaches, client demand, ESG data, regulatory lag and more.

Taylor Pearce is Economist, Economic and Monetary Policy Institute, OMFIF.

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