Major institutional investors, including Colonial First State and BT Investment Management, say end-client demand for better disclosures on responsible investment practices is flowing through asset owners into fund managers.

The Commonwealth Bank of Australia’s retail wealth-management arm, Colonial First State, has called on its investment managers to increase their responsible investment disclosures, because its clients are demanding more information about the topic as it ascends into the mainstream.

Among investment managers, 90 per cent claim to consider environment, social and governance (ESG) factors in their investment process, but a Colonial First State survey found that while there have been recent improvements on disclosures about governance, social issues and the environment were still largely ignored.

“Disclosure of responsible investment activities is becoming a must with the PRI [Principles for Responsible Investment], FSC [Financial Services Council] and TCFD [Task Force on Climate-related Financial Disclosures] all ramping up disclosure requirements,” Colonial First State senior manager corporate responsibility, Jodie Tapscott, told delegates at the Investment Magazine Fiduciary Investors Symposium held in the Blue Mountains May 15-17, 2017.

Tapscott, speaking in a panel discussion, said CFS aimed to increase its responsible investment disclosure in pitch books, process documents and quarterly reports, through stewardship, engagement and voting clauses.

“But to do this effectively, we need our managers to provide us with the information we require,” she said.

Actions needed before disclosure can happen

One of the other key takeaways from the survey was that very few managers were considering climate change as a macro risk.

“Given the scientific evidence, the global moves to reducing emissions, and changing consumer and investor expectations, we had a much higher expectation that climate change risk would be more established in fund managers’ minds,” Tapscott said. “As a subsidiary of Australia’s largest bank, we recognise the investment risk of climate change and expect our managers to do the same.”

Tapscott added that some managers were exceptions demonstrating best practice. This included considering: ESG risks at the total portfolio level; exposure to human rights issues in companies’ supply chains; and exposure to environmental and climate-change risks. These managers were also engaging with companies and voting beyond governance factors.

“Being able to measure and manage these risks at a total portfolio level will go a long way towards demonstrating to asset owners that managers are integrating ESG into their entire investment process,” Tapscott said.

Substantial growth in assets under management

BT Investment Management head of responsible investments Edwina Matthew, who was also on the panel, said she had witnessed the same trend of clients demanding more robust disclosures around responsible investment policies and practices.

Matthew said BTIM, which is minority owned by Westpac Banking Corp, had seen substantial growth in the proportion of its total assets under management  deployed in responsible investment strategies in recent years.

“We are just north of $2 billion in responsible investing assets,” she said. “While that has been dominated by Australian equities, we have seen a growth in responsible investment strategies in international equities, Aussie and international fixed income, and also diversified space.”

The amount of money entering the system puts added impetus on ensuring alignment between asset owners and managers, she said.

Matthew suggested a list of “good questions” an asset owner can ask its managers to help align ESG expectations.

These include:

  • Do you view ESG as a risk-mitigation tool or as a source of alpha?
  • What is your approach to engagement with companies on ESG issues? Who executes your proxy voting decisions?
  • What evidence can you provide of a connection between active ownership activities and portfolio-specific ESG risks/opportunities?
  • How do you approach ESG-based disruption risks, like climate change, supply-chain management and cyber-security?

Asset consulting firms are also key agents in helping asset owners and their external fund managers navigate their responsible investment policies.

Mercer global business leader of responsible investment, Helga Birgden, another participant in the panel, noted that integrating ESG thinking into a firm’s way of doing business was a challenge that took time.

“It’s definitely a process, but progress is being made,” Birgden said. “Mercer has been very active on ESG issues. For example, we are participating on the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures. We are also signed up to G20 and G7 [working groups on climate change]. And the Mercer funds themselves incorporate ESG in a comprehensive way.”

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