Sasi Ponchaisang / 123RF

Across the globe, a higher percentage of asset managers are using “explicit qualitative or quantitative environmental, social and governance (ESG) factor assessments” as part of their investment processes, says Russell Investments’ sixth annual ESG Manager Survey.

The survey and accompanying report, which examines the practices and views of 400 asset managers across a range of asset classes, said that 78% of respondents used ESG analysis (up from 73% a year earlier) and 75% were signatories to the United Nations’ Principles of Responsible Investment (up from 72% in 2019).

Of the 400 respondents, the majority of firms (60%) were headquartered in the U.S., followed by the U.K. (14%) and Continental Europe (8%). The rest were located in other regions, including Canada. Forty per cent had assets under management (AUM) of less than US$10 billion, while 25% had AUM of more than US$100 billion.

A regional breakdown showed that firms in Continental Europe continued to be the most committed to considering ESG factors — 97% of those respondents had embedded ESG processes, up from 95% a year earlier. Next in line were firms in Australia or New Zealand (93%, up from 85%), Japan (89%, down from 90%) and Canada (87%, up from 72%).

The survey found that asset managers are “increasingly combining externally produced ESG data with internally produced ESG metrics” and taking different approaches to their ESG analysis.

For example, while nearly half of respondents (46%) relied on internal data, more than one third (35%) use external data. Thirty-five per cent of respondents said their external data is “augmented” with internal information.

For equity managers specifically, 44% relied primarily on internal data that was used alongside outside data, while 40% relied mostly on external data that was complemented by internal data.

The most common external source of data remained MCSI ESG research at 42%, up from 38% a year ago. Sustainalytics was in second place at 37%, up from 30% a year ago.

“The survey indicates that many asset managers subscribe to multiple ESG data providers, suggesting there is yet to be a provider that offers a single solution for asset managers across all asset classes,” the report said.

Top ESG risks

The ESG factor that impacted investment decisions the most was governance, at 82%. But that compared to 86% in 2019, meaning that other risk factors are becoming increasingly important.

In particular, respondents noted that environmental factors are starting to weigh more on their decisions, at 13%, up from 9% a year earlier.

“We see a sizable uptick among managers who are [considering climate risk] based in Continental Europe,” the report said. “This uptick in environmental factors speaks more to local regulations related to climate change, than impact to financial values.”

The report noted that ESG factors are most often taken into account when managers identify material financial risks.

“Sixty-three percent of the respondents claim to incorporate specific ESG considerations when the materiality is high, versus 55% from the previous year,” the report said, adding that “an increased number of respondents incorporate ESG factors into investment decisions when there is a potential impact to security risk generated from higher material considerations.”