What does an asset owner look for in an asset manager to help them navigate sustainability and ESG investing? Based on our most recent research, the ESG Global Survey 2019 1, we thought we would offer some useful insights to asset managers.
Asset owners2 play a leading role in the financial ecosystem, being the guardians of trillions of dollars in assets. As noted by the United Nations Principles for Responsible Investment (UN PRI), asset owners can be considered “universal owners” that “effectively hold a slice of the overall market, making their investment returns dependent on the continuing good health of the overall economy”3.
In support of a robust and sustainable economy many asset owners are integrating ESG into their investment decision-making. Key to this is the principal-agent relationship between the asset owner and the asset manager. The asset manager will often be implementing the ESG mandate, with the exception of those asset owners who have large in-house investment teams. Indeed, ESG investing is one source of differentiation for an asset manager in today’s competitive environment. To be successful they need to know what the asset owner is looking for.
Asset owners’ decision criteria
Our 2019 ESG Global Survey found the key criteria for asset owners when choosing an asset manager for ESG investment to be:
- Research capability (42%)
- Proven track record (41%)
- Reporting capability (37%)
This represents a significant change in respondents’ preferences from our 2017 survey4; where proven track record was cited by only 14% of respondents and reporting capability by 11%.
Surprisingly competitive fees did not feature in the top three criteria. However, there were some interesting regional differences. In Europe, proven track record (44%) was the top pick followed by competitive fees (41%). In North America, proven track record (52%) was followed by having a dedicated ESG investment team (39%). In Asia Pacific the key criteria for half of respondents was ESG research capability followed by track record (41%) and the ability to use smart technology (41%). In fact, fees ranked as one of the least important criteria for Asia Pacific investors and North America investors, potentially highlighting the opportunity for asset managers to optimally structure their strategies to meet owners’ needs in those regions.
Do asset owners ‘walk the talk’; in other words, do they reward asset managers with mandates specifically because of their ESG capabilities? The evidence is ‘yes’, and overwhelmingly so in Asia Pacific, with 64% of respondents saying so, well ahead of their European and North American counterparts.
In terms of the biggest challenges for asset owners, they cited the following as their main hurdles:
- Inconsistent quality of data (37%)
- Costs required to invest in smart technologies (34%)
- Lack of advanced analytical tools/ skills (31%)
Our ‘dating tips’ for asset managers
- Highlight your firm-wide commitment to sustainability – asset owners require a strong understanding of an asset manager’s values and commitment to sustainability, their deep engagement with investee companies, ground-breaking research contributions, and membership of industry working groups to help shape future regulation and reporting
- Emphasise your ESG investment differentiators – showcase the technical sophistication of your ESG teams, your continual investment in cutting-edge technology and reporting tools, and your wide array of sustainability metrics
- Speak about your proven track record in ESG – asset owners will require proof as to how your strategies have delivered long-term risk-adjusted returns taking into account ESG criteria, how your strategies are flexible and adaptable to target a variety of sustainability goals, and your record in engagement and in active ownership to enhance system-level outcomes in your investee companies
- Your longstanding partnership with asset owners – highlight how you have supported your asset owner clients through data challenges and reporting solutions, how you navigate a changing ESG-driven regulatory environment and how you can work with an asset owner on ESG topics such as engagement, impact investing and co-investments, to future-proof the investment programme
Sustainability means a long-lasting ESG partnership
Our ESG survey showcases clear investor demand for the growing market of sustainable investment products. We are at a vital stage in the evolution of ESG and sustainability which asset managers can take advantage of, to show their ESG credentials and build long-lasting partnerships in a sustainable manner.
1 The ESG Global Survey 2019: Asset Owners and Managers Determine their ESG Integration Strategies. BNP Paribas and Longitude Research. Accessed at https://securities.cib.bnpparibas/app/uploads/sites/3/2019/08/esg-global-survey-en-2019.pdf2 We define asset owners as pension funds, superannuation funds, sovereign wealth funds, insurance companies and central bank reserve management funds.3 The SDG Investment Case. Accessed at https://www.unpri.org/sdgs/the-sdg-investment-case/303.article4 Great Expectations for ESG: What’s Next for Asset Owners and Managers? BNP Paribas and Longitude Research