Executive summary

Even though many asset owners have made commitments to responsible investment, the majority have yet to ensure that these are effectively implemented. There are inconsistencies in investment practices in different asset classes, high-level statements on sustainability or environmental, social and governance issues are often missing from investment beliefs, and responsible investment commitments are not embedded in investment mandates.

This creates a multiplier effect throughout the investment market. Weak implementation of responsible investment by individual asset owners sends signals to the investment market as a whole that responsible investment is not a priority for asset owners. In turn, this limits the willingness of investment consultants and investment managers to focus on responsible investment and ESG issues in their products and in their advice.

By implementing their commitments to responsible investment with sufficient scale and depth, asset owners can accelerate the development of responsible investment through the investment chain.

Scale

• The number of asset owners implementing responsible investment, including strategically important asset owners, such as the Government Pension Investment Fund of Japan.
• The total AUM of responsible investment assets.

Depth

• The quality of implementation, across asset class.

There are a range of internal and external reasons why asset owners do not effectively implement their responsible investment commitments or take full account of ESG issues in their investment beliefs, governance and mandates. Common internal challenges include board and trustee scepticism about the investment value of responsible investment, skills gaps in relation to ESG analysis and decision-making, concerns about the costs of developing the necessary processes, systems and skills, and a narrow interpretation of investment objectives. The external challenges include the limited range of responsible investment-oriented investment products, and the general lack of interest on the part of investment consultants and legal advisers in responsible investment.

The weaknesses in asset owner implementation and the consequent effects on investment manager behaviour also affect the relationship between investors and policy makers. Our research indicates that many policy makers are sceptical about investors’ motivations: they see piecemeal implementation of responsible investment as indicative of a deeper lack of commitment to responsible investment and sustainability.

This leads them to focus on the direct financial contribution that investors can make to addressing global systemic problems such as climate change and environmental and resource sustainability, rather than focusing on the wider contribution that investors could make through areas such as stewardship and public policy.

For some asset owners, including those that contributed to this report, responsible investment is already deeply ingrained in investment processes. ESG issues are hardcoded in investment strategy at par with asset-class characteristics and macro-economic drivers such as interest rates and inflation.

Commitments made and the actions taken by these asset owners need to be replicated at scale across the wider investment industry. Specifically, asset owners should:

• account of ESG issues in investment decision-making and in engagement with companies and issuers;
• implement investment beliefs throughout the organisation, including Board/Trustees, CEO/CIO, portfolio managers, research analysts and legal counsel;
• engage public policy makers on issues relevant to sustainable development finance;
• integrate sustainability factors in the selection process for asset consultants and other advisers;
• integrate sustainability factors in the selection process for investment managers, including:
  • reviewing the investment manager’s investment beliefs;
  • assessing the ESG skills of all investment staff;
  • setting out ESG reporting expectations;
  • issuing investment mandates with ESG integration and reporting requirements, including on stewardship activities and turnover, with fees and pay structures that support ESG performance;
  • assigning specific weight to ESG factors in investment manager and investment consultant appointment;
• integrate sustainability factors in the monitoring process for investment managers and investment consultants, including:
  • reviewing the investment manager’s voting processes;
  • including ESG issues as a standard agenda item at performance review meetings;
  • assessing how the investment manager incentivises brokers and independent research providers to publish ESG research;
  • assessing how the investment manager engages policy makers on ESG issues.