Small and mid-size asset managers with a good track record in sustainable investing are increasingly featuring in the restricted circle of partners carefully chosen by private banks, as they build and enhance their product offering to meet growing client demand.
When UBS, the world’s largest wealth manager, sought an external socially-conscious investment firm, among others it chose London-based Hermes Investment Management, with £34bn ($44bn) in AuM. Hermes’ strategies are now employed in UBS’ fully sustainable portfolios, launched last year, already approaching $5bn in client assets and growing fast.
The same goes for rival banking behemoth Citi, which has recently embraced environmental, social and governance (ESG) principles as fundamental components of its investment philosophy. It is now seeking asset management partners, whose approach to ESG must be in their DNA, explains Gavin Rankin, Emea head of managed investments at Citi Private Bank.
Virtually all asset managers today showcase their sustainable capabilities, but there are huge differences in the way they define ESG, the approach they take and the scoring systems they use to construct portfolios. Thus, the due diligence process needs to incorporate an extra factor, aimed at determining whether the manager runs money to a set of values that have been enshrined as part of their investment process. This needs to be consistent, demonstrable and repeatable, according to Citi.
Large asset management firms may find it harder to evolve their entire investment process towards more sustainable strategies compared to smaller, nimbler players. And firms that integrate ESG factors across their entire product range are more credible than those running a handful of good sustainable products. These considerations are driving Citi towards asset managers that it would have not considered in the past, “generally with a European bias, and smaller than giant names we are very familiar with”.
For financial juggernauts, it is certainly no easy feat to alter course, change their corporate culture and swim against the tide of market rules, and this cannot happen overnight. But only when large asset management firms will provide clear evidence that they are integrating ESG factors into their core practices, will they be able to use their size and influence to promote the shift to sustainability that the world so urgently needs.
BlackRock, the world’s largest asset management firm with $6tn in AuM, is a case in point. Despite an acknowledgement last year from CEO Larry Fink that the house must engage more with the companies it invests in, just 2.5 per cent of its US-domiciled funds are “sustainable”. BlackRock has faced criticism from the World Resource Institute for a weak voting record on climate-related disclosure, “very high” exposure to fossil fuel development and “lack of systemic shift” in how the firm approaches sustainability.
A limited choice of products, particularly in certain asset classes such as fixed income and alternatives, is a major barrier to the growth of ESG and impact investing, according to PWM’s global asset allocation research. At the same time, more than 90 per cent of private banks we interviewed believe allocation to ESG and impact investing will significantly grow in their client portfolios over the next three years.
This means that for asset managers of all sizes, who will be able to get their sustainable and impact investment strategies right, the prize is significant.
Elisa Trovato is deputy editor of Professional Wealth Management. Follow her on Twitter @elisa_trovato
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