Designed to be of practical value for key stakeholders in the financial community, this first in a series of Asset Manager ranking reports by ShareAction examines the adequacy and sophistication of 75 of the world’s largest Asset Management Firms’ approach to responsible investment.

The data analysed for this report was collected via a survey, with the results summarised into 14, high level findings explored in depth within the main body of the report. The survey was structured according to a series of themes, namely:

• Responsible Investment Governance
• Biodiversity
• Human Rights and Labour
• Climate Change

Mapped to the structure of the Taskforce for Climate Related Financial Disclosures (TCFD’s), the questions in the survey carry unequal weightings, hence some answers contributed more to the overall score. Performance bands were assigned to denote ranking, with the highest attainable ranking being AAA, and the lowest E.

The 75 Asset Management Firms selected for ranking have been chosen from the Investment and Pensions Europe (IPE’s) 2018 Top 400 Asset Manager List. To ensure global representation, the paper limited the number of European entries to 40 and the number of US entries to 25, with the remaining firms comprised of Asia Pacific and one African firm.

Unsurprisingly, European firms dominate the leader board, with 19 out of the top 20 scoring firms being European. However, no firm scored a AAA, and overall results indicated that understanding of Environmental, Social and Governance (ESG) issues were limited and that the majority of firms were failing to consider and account for the negative impacts that their investments were having on the world. This came despite the fact that all 75 firms were Principle’s of Responsible Investment (PRI) signatories and many were also Climate Action 100+ signatories, or claimed to be TCFD aligned/compliant. It is therefore cautioned that supportive initiatives, like the PRI, cannot be used as a proxy for ESG performance.

The report notes that these troubling results are not only incompatible with achieving the Sustainable Development Goals (SDG’s), but also with the values of the next generation and the evolving legislative climate, especially in the EU.

Overall, the sentiment here is that the financial sector needs to make stronger progress towards supporting the realisation of the SDGs, in particular those related to Human Rights and Biodiversity. This is said to be vital to building strong economies and continued economic growth, which is the structural source of financial return for any long-term investor.

Furthermore, it appears that many tools available to investors, such as proxy voting, are being under-utilised, whilst other areas of deficit include a lack of ESG training (especially at a senior management and executive level), and availability of quality ESG investment products (even for high scoring firms).

Broadly, the report recommends:

• Asset managers use this report to benchmark their individual performance and inform areas for improvement.
• Asset owners and investment consultants use this reports information to challenge asset managers, inform the selection of managers, and highlight positive trends set by leading players.
• Policymakers use this report to identify areas of sector-wide strength and weakness and to determine appropriate policy action to help protect consumers of asset management services and the public interest.

1. Achieving shared societal goals, such as the SDGs and the Paris Agreement, is only possible if powerful financial actors begin to factor in how their investment decisions directly impact sustainability factors. At present, the majority of the world's largest Asset Managers are failing to grasp the systemic threat posed by failing to address these factors - per Finding 1 - biodiversity decline being one example.
2. Furthermore, it appears that many tools available to investors, such as proxy voting (both cost effective and impactful), are being under-utilised, whilst other areas of deficit include a lack of ESG training (especially at a senior management and executive level), and availability of quality ESG investment products (even for high scoring firms).
3. The majority of assessed asset managers (around 80% of those analysed) do not have board-level accountability on responsible investment (per Finding 11).
   
4. Asset Managers need to start accounting for the externalities of their decisions by reporting on the real world impact of investment decisions, holding executives of companies to account for their actions and explicitly demanding action on ESG issues through strong and transparent voting policies.
5. Investment consultants must recognise the critical link they make between asset owners and managers, and recommend asset managers that have strong and authentic engagement with ESG where clients values align.
6. Policy Makers must develop the regulatory landscape with a vision to drive sustainable finance beyond climate action, including the laying out of strong supervision, penalties and expectations for the investment community.
7. Whether you are an active or passive investor, investment strategy is not a barrier to adopting a leading approach to responsible investment. This is evidenced by the high ranking of 'A' received by one of the passive managers ranked in this report.
8. Short-termism continues to be the enemy of progress. A conceptual shift in the way we manage ESG factors is therefore required: we must think beyond what is financially material at the portfolio level, and look to integrate ESG factors based on objectives of long term financial, social and environmental prosperity.
9. The urgency of the action necessitated by the severity of the crises in the natural and human world means small incremental steps from a business-as-usual approach will not be adequate.