IN FOCUS6-8 min read

Sustainability: amplifying our influence

Imagine if fund managers responsible for £100 trillion of assets embraced best practise in sustainable investment. We are using our influence with the aim of making that a reality.

02/11/2023
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Authors

Emilie Shaw
Portfolio Director and Sustainability Lead

As a large investor in third-party funds, we seek to engage with external managers to understand how they manage these risks and their approach to ESG. We believe this will translate into better long-term returns for our clients.

Our aim is to raise standards of across the asset management industry. We encourage managers to adopt robust ESG policies, commit to net zero, set ESG targets to which they can be held accountable and influence the companies in which they invest through a constructive engagement and voting approach. We hope to show positive progress as we use our influence to push for change.

Every year we survey over 200 asset managers on our list of approved funds to understand their approach to ESG.

To advance our efforts, we have developed a comprehensive ESG questionnaire that is sent to managers annually. The aim is to understand for how long and to what extent a firm has been implementing ESG; how it is aiming to improve its own ESG performance (such as carbon footprint or board diversity); how much resource it has dedicated to ESG and how robust its policies are; and finally, how strongly it has embraced active ownership through engagement and voting.

Responses are analysed and managers receive a score from 1 to 5. Those scoring a 5 are considered “leaders” in sustainable investment, while those that score a 1 or 2 are deemed “laggards” and are prioritised for engagement. The questionnaire evolves year-on-year to reflect what we believe to be current leading ESG practises.

2023 Survey results: year-on-year progress

71% of managers are meeting our base line expectations

We are delighted to see a marked improvement from our 2022 survey, with 71% of our managers meeting or exceeding our base line expectations, compared to 54% in 2022. This is particularly pleasing as we raised the bar for receiving high scores significantly in 2022, in recognition that practises have advanced and “good” now reflects a higher standard than in the past.

Reduction in Laggards (1s and 2s), with improvement across the rest particularly in the number of Leaders (5s)

Asset Manager Survey - Chart1

These results feed directly into our engagements with managers, and we are focused on working with those that fell short. This year, we have initiated engagements with seven of the managers that score a 1 or a 2 on the ESG firm-level survey, with the aim of engaging with all laggard managers by the end of the year. We provide managers with feedback based on the survey results, communicating our expectation for improvement over the coming year.

Engaging for change: Alternative investment trust managers generally exhibit weaker scores compared to our broader universe of fund managers. We led a group engagement with a cohort of these managers, where we highlighted key areas for improvement with examples of what we believe to be “best practise.” Key issues discussed included net zero commitments and the quality of the commitments made, board management diversity, ESG-linked incentives and our expectations going forward. We intend to follow up directly with more targeted engagement with certain managers.

ESG integration has become mainstream

Almost 100% of managers have an ESG policy in place.

Asset Manager Survey - Chart2

Almost 90% of managers are now UNPRI signatories

% signatories to UNPRI

Asset Manager Survey - Chart3

Source: Cazenove Capital asset manager survey.

Nearly 50% of managers have made a net zero commitment

However, progress has stalled since last year and in some cases declined.

Asset Manager Survey - Chart4

Source: Cazenove Capital asset manager survey.

Earlier this year, one of the world's largest asset managers pulled out of the Net Zero Asset Managers (“NZAM”) initiative and rescinded their net zero commitment. In response, we launched an engagement with the manager, including 3 face-to-face meetings, to express our concerns about the move.

As a signatory to the NZAM initiative, climate commitments remain high on our engagement priorities. Our recently published Climate Transition Action Plan details how we intend to engage managers in this area and push for progress.

Coal phase out is accelerating

And over a quarter of managers now have a coal phase out policy in place, up from last year.

Asset Manager Survey - Chart5

Less than a quarter of managers have made a commitment on biodiversity loss

Asset Manager Survey - Chart6

Source: Cazenove Capital asset manager survey.


As part our Plan for Nature and commitment to tackle biodiversity loss, we intend to engage with managers who are heavily exposed to commodity-driven deforestation.

Gender diversity of boards remains mixed

Despite a headline increase in gender diversity, worryingly there has been an increasing number of managers who have no female representation on their boards.

Asset Manager Survey - Chart7

Source: Cazenove Capital asset manager survey.


We will be coordinating an engagement with those firms where board diversity levels are particularly concerning in coming months.

Engagement

78% of managers have an engagement policy in place
The top thematic ESG engagement priorities in 2022 were climate change, governance and biodiversity.

Asset Manager Survey - Chart9

Voting

97% of managers have a voting policy, up from 87% last year

Early this year we wrote to 93 asset managers, to set out our view of voting best practise. Meeting these recommendations ensures managers are not just talking about sustainability and ESG but are actually taking demonstrable action.

“Fund managers should be using their votes to hold the underlying companies in which they invest to account on ESG issues. Our letter clearly sets out our interpretation of best practise” said Chloe Mallo, Investment Manager. “We have committed to this approach for the investments we hold directly on behalf of our clients. We encourage managers that we work with to do the same.”

Positively, managers continue to make more ESG voting commitments, with climate change remaining the focus.

Asset Manager Survey - Chart8

Source: Cazenove asset manager survey.


How does this influence our fund selection?

We report on the spread of manager scorings across core and sustainable models within our quarterly factsheets. Exposure across the board to weak scoring managers remains very low. As is expected, the bar for inclusion into our sustainable models remains more stringent and therefore these portfolios have a strong emphasis on ESG leaders.

Asset Managers Average Scores

Average scores across Core and Sustainable portfolios

Core

Asset Manager Survey - Chart10

Sustainable

Asset Manager Survey - Chart11

In line with our engagement blueprint, we are coordinating a number of engagements with managers on our priority topics. We look forward to updating you with our progress in coming months.

Authors

Emilie Shaw
Portfolio Director and Sustainability Lead

The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.