Introduction
ESG considerations continue to be an important part of Frontier’s assessment of managers and specific products.
This approach aligns with the needs of underlying investors (our clients). We believe active managers are better able to achieve their investment objectives with the appropriate consideration of ESG factors. Finally, passive managers can, and should, seek to improve the intrinsic performance of investee companies themselves through ESG incorporation, including via engagement and proxy voting.
Frontier has been formally assessing the ESG capabilities of managers for many years. After an extensive review process in 2020, we finalised a new and comprehensive scoring system for our sector research teams to use in assessing ESG credentials when rating both active and passive managers (in all asset classes). This is known within Frontier as our Manager ESG Assessment Toolkit. The assessment process continues to involve completion of a standard responsible investment (RI) questionnaire, supplemented by targeted dialogue with each manager specifically on ESG matters.
A number of asset owners have utilised Frontier solely to assess managers on their ESG capabilities using this process – for some as a one-off project and for others as an ongoing assessment of their managers ESG capabilities.
In this paper, we revisit Frontier’s ESG assessment toolkit and how it works. Building on our 2022 ESG assessment of managers paper, we analyse scoring results, delving deeper into equities subsectors to identify trends and highlight key differences or improvements over the years.
The final word
There are again some important takeaways here for clients with regard to their equity managers and ESG.
- Clients often have a combination of different equities managers that form their portfolio and ESG integration can vary widely. There is a high likelihood most asset managers have at least one manager that needs some push or reminder to continue to review and enhance its ESG efforts.
- We understand the significant time and resources it takes for managers to keep up with this evolution in ESG, particularly for smaller teams and/or firms; however, believe this is an ongoing commitment that is worthwhile and important.
- Small cap managers (domestic and global) should be challenged to keep improving as other equities sub-asset classes continue to advance.
- Equally, we believe there is space for passive managers to evolve and while integration of ESG in the process is more challenging, improvements in company engagement and reporting are areas where enhancement has been focussed and can continue.
- Some managers remain more resistant to others when it comes to collaborating with competitors or contributing resources to broader industry efforts, but we believe there is more that managers can do when it comes to collective engagement.
- Pleasingly, ESG integration of process, a key component of the assessment, and reporting are where we have seen the most improvements. Across the board, managers have evolved their processes and standardised ESG reporting, as well as annual stewardship reports, are now the norm.
- Climate change has also been an important area of enhancement, most notably in ESG risk assessments (transition and physical) as well as disclosure.
While there have not been significant changes when comparing the assessment scores at the aggregate level, these manager ESG assessment scores will continue to evolve at the cohort level and the individual manager level, given the nature of the components and the evolving regulatory standards and stakeholder expectations. It is important data to continue to review and track for clients via this detailed framework.
Learn more
Frontier’s Equities Team would be happy to discuss the ESG scoring and assessments further. We are able to provide this information with respect to specific portfolios including component scores and reasoning. This may assist clients in keeping informed of how managers are evolving, including identifying the laggards and how the managers stack up relative to the broader peer group. If you want to discuss this paper in more detail or learn more about how we can help, please get in touch with our Equities Team or your consultant.
