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Today New City Initiative is comprised of 48 leading independent asset management firms from the UK and the Continent, managing approximately £400 billion and employing several thousand people.

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The Next Reporting Challenge for Asset Managers

The Next Reporting Challenge for Asset Managers

ESG having once been an outlier issue for most asset managers, is becoming increasingly important, and it is a metric which more organisations are utilising in their portfolio construction processes. The primary motivations for applying ESG measurables in stock selection are the purported performance benefits it brings, investor pressure and growing regulatory intervention. As such, ESG is something which investment managers must understand and have a clear position on.

The regulatory drivers

While governments are actively pursuing green policies, regulators are not far behind. The EU recently announced that it would implement rules to help enable asset managers and institutional investors to incorporate ESG consistently into their decision making, adding their policies would need to be fully disclosed.  Similar provisions are already in play in France, where asset managers and investors over a certain size now have to document and publish how they apply ESG into their day to day operations, and disclose their carbon footprints

Simultaneously, the FSB launched its own voluntary climate financial risk reporting template - the Task Force on Climate Related Disclosures (TCFD) – which is being increasingly adopted by market participants. Disclosure obligations like the TCFD are not currently mandatory but a minority of institutional investors are beginning to request managers provide it. Meanwhile, the UN PRI has upped its game and threatened to de-list signatories which they do not believe are living by the PRI guidelines.

Performance benefits

Admittedly, the data evidencing that companies which score highly on ESG deliver better shareholder returns versus those that do not apply ESG, is mixed but the initial results do look promising, and should not be disregarded entirely. After all, a company which is not sustainable can hardly be described as being a solid long-term investment play in a political backdrop increasingly dominated by ESG concerns, and where agreements like UN SDG and COP21 are radically altering corporate behaviour.

Take plastics. An asset manager with exposure to a company heavily dependent on single-use plastics, must carefully consider that holding given the EU’s recent announcement that it intends to outlaw single use plastic utensils such as straws and cutlery. The same is true for managers with investments in heavy carbon emitting industries, as governments globally implement gradual bans on diesel vehicles. If companies do not have transition plans in place to deal with these challenges, then institutional investment will dry up.

Investors are also becoming more conscientious about where their returns are sourced from. Charities and religious endowments have long demanded that managers root out so called sin stocks from their portfolios such as companies linked to alcohol, firearms or tobacco, but such requests are now becoming far more mainstream. A lot of this is down to demographic change as younger investors appear to be more attuned with sustainable investing than previous generations, prompting reform at a number of institutions.

Asset management initiatives like documenting and monitoring internal carbon footprints are a potential starting point, whereas other firms – resources permitting – might even begin filling in the TCFD. Not only would this demonstrate resolve to ESG aware clients, but it could make it easier for firms to adhere to climate risk regulations and disclosure obligations as and when they are eventually introduced.