Fund Managers

Four Ideas on Choosing the Right ESG Manager

ESG (environment, social and governance) investment strategies continued to enjoy a significant increase in assets, rising $2.5 trillion in just two years to $8.7 trillion in the U.S. alone*. Over the next few decades, $30 trillion may pass to the next generation in the private wealth market, which would fuel the ESG trend**. Investors new to the ESG space may find it a challenge to know where to start when seeking out an ESG strategy, as there seems to be an ever growing set of strategies available in the market place. However, there is no one-size-fits-all approach by managers to incorporate ESG principles into the investment process. Below we propose some ideas on what to look for in an ESG manager.

Looking for the right ESG fund? Understand the depth of the manager’s ESG expertise

Four Keys to Picking ESG Managers

Mamadou-Abou Sarr, Global Head of ESG

The challenge is to identify which products are high quality, leveraging meaningful data and analysis in a thoughtful, innovative way that meets the investor’s needs. There is a myriad of different approaches to ESG investing which stem from the investment organization’s philosophy. When assessing an ESG product, there are four key points to bear in mind:

· Responsible Organization: A small subset of asset management firms have responsible investment principles engrained in the firm culture, philosophy and mission statement. It’s important to assess the firm’s overall commitment to responsible investing. This commitment can be deduced from the points below.

· Dedicated ESG Investment Professionals: Many firms focused on ESG investing have dedicated analysts who identify ESG issues relevant to specific regions and industries. They stay abreast of evolving regulations and policies, evaluate ESG data providers and systems, and educate their internal investment professionals. Alternatively, some firms incorporate ESG analytics into the traditional security analysis, embedded in the research process of the security analyst.

· ESG Research: Does the firm leverage ESG data and analytics in security analysis from a risk perspective? While many asset managers have the ability to screen out specific securities and industries based on client restrictions, few managers incorporate ESG analysis across investment decisions as an engrained component of portfolio construction.

· Shareholder advocacy: With a vested interest in a company’s ESG performance, many investment managers will work with portfolio companies to influence their ESG profile. There are several methods of working with companies to improve ESG characteristics such as voting shareholder proxies, engaging directly with company management, and engaging with competitors to enhance industry standards.

One More Key: Knowing Your ESG Investing Purpose

Avantika Saisekar, ESG Product Specialist

With such a broad spectrum of ESG options, the number of choices can be overwhelming. The foremost step in evaluating which approach is appropriate for any given investor is defining the purpose or goal of the ESG investments. Do you want to tilt toward environmental, social or governance issues, or all three equally? ESG investment approaches can result in varying levels of success. While qualitative, bottom-up research can provide more targeted ESG exposures and a more holistic view on a company, it can be more costly to implement. The use of third-party ESG data can be an effective way to reduce management fees, though may lack details on materiality and directionality. If third-party data is utilized, independent assessment and verification would be prudent.

We are of the firm belief that investors can benefit from seeking ESG-focused managers and do not need to forego performance to invest well. However, discernment is critical in the manager selection process.

With contributions from Trent Cohan

*2016 Report on Sustainable and Responsible Investing Trends. US SIF Foundation

* https://www.accenture.com/us-en/~/media/Accenture/Conversion-Assets/DotCom/Documents/Global/PDF/Industries_5/Accenture-CM-AWAMS-Wealth-Transfer-Final-June2012-Web-Version.pdf

By Mamadou-Abou Sarr, Global Head of ESG at Northern Trust Asset Management  and Avantika Saisekar, ESG Product Specialist at Northern Trust Asset Management 

IMPORTANT INFORMATION. This material is provided for informational purposes only. Information is not intended to be and should not be construed as an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Current or prospective clients should under no circumstances rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. Information may not be duplicated in any form or disseminated without the prior consent of Northern Trust. Northern Trust and its affiliates may have positions in, and may effect transactions in, the markets, contracts and related investments described herein, which positions and transactions may be in addition to, or different from, those taken in connection with the investments described herein. All material has been obtained from sources believed to be reliable, but the accuracy, completeness and interpretation cannot be guaranteed. The opinions expressed herein are those of the author and do not necessarily represent the views of Northern Trust. Information contained herein is current as of the date appearing in this material only and is subject to change without notice. Indices and trademarks are the property of their respective owners. All rights reserved.

There are risks involved in investing including possible loss of principal. There is no guarantee that the investment objectives of any fund or strategy will be met. Risk controls and models do not promise any level of performance or guarantee against loss of principal.

© 2017 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability in the U.S. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulation. For more information, read our legal and regulatory information about individual market offices (available at northerntrust.com/disclosures). Northern Trust Asset Management comprises Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc. and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company. In Singapore, Northern Trust Global Investments Limited (NTGIL) and Northern Trust Investments, Inc. are exempt from the requirement to hold a Financial Adviser’s Licence under the Financial Advisers Act and a Capital Markets Services Licence under the Securities and Futures Act with respect to the provision of financial services. In Australia, NTGIL is exempt from the requirement to hold an Australian Financial Services Licence under the Corporations Act 2001 in respect to the provision of financial services. NTGIL is regulated by the FCA under U.K. laws, which differ from Australian Laws. Issued by Northern Trust Global Investments Limited.

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