How asset managers stack up (when it comes to ESG investing)

A new evaluation from Morningstar reveals which asset managers are serving as leaders in their commitment to ESG (Environmental, Social and Governance) while highlighting the core qualities of those firms that are making sustainability a prominent piece of their investment strategy.

The Morningstar ESG Commitment Level evaluation examines 94 asset managers, providing insight on a topic that has become increasingly prominent across global investment circles. The evaluation is designed “to help investors better understand which asset managers are committed to delivering the sustainability outcomes that best meet investors’ preferences.” It marks the second time that Morningstar has performed the evaluation – the inaugural evaluation was released in 2020.

“Financial markets are always dynamic, but the pace of change and evolution in ESG investing over the past three years is quite something to behold,” according to the report. “Increasing investor interest, regulatory developments, and improvements in data and technology all require asset managers to move quickly but thoughtfully.”

Morningstar divided the asset managers into tiers based on their level of commitment to ESG. Eight asset managers reached the highest level – Leader – while another 17 scored Advanced. The Basic category counted 43 firms, the highest level of any group, while another 26 firms ranked at the bottom of the pack in the Low level.

The eight asset managers to earn the Leader designation are Robeco, Parnassus, Calvert, Impax, Australian Ethical, Boston Trust Walden, Affirmative Investment Management and Stewart Investors.

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“In most cases, these firms have focused on sustainable investing (formerly known as responsible investing) since day one, and this philosophy remains core to their identities today,” according to the report. “These firms operate from a shared belief that sustainability goals go hand-in-hand with long-term financial return, and this is reflected at all levels of the organization.”

Among the qualities found in Leader asset managers, Morningstar pointed to innovative frameworks to assess ESG risks, strong internal cultures of sustainability, improved disclosures and practices in portfolio companies, collaborating with regulators and peers to raise sustainability standards, employing expert talent, compensation programs that incentivize sustainability, robust ESG data and tools, and active ownership practices.

By contrast, the asset managers in the Low category have tended to be slow to adopt ESG policies and processes, while also keeping a low percentage of assets in ESG-focused funds, according to Morningstar. Some asset managers graded as Low are increasingly incorporating ESG standards but their late start means they trail peers who have made ESG a higher priority. Morningstar noted that the “vast majority” of firms have improved their practices in recent years.

Challenges for larger firms

Larger firms did not fare well in the evaluation. Seven of the 10 largest managers received a Basic rating and the other three were ranked as Low. Emphasizing ESG is challenging for larger firms that “typically serve a broader spectrum of investors with various needs and ESG preferences,” according to Morningstar. For instance, Morningstar’s report noted the big three asset managers of BlackRock, Vanguard and State Street are inherently limited in how committed to ESG matters they can be. That’s because the bulk of their assets track non-ESG indexes. Vanguard received a Low rating in the evaluation, while BlackRock and State Street each earned Basic.

“These managers built their businesses through commendable strategies such as low-cost investing, technological innovation, and sharp stock-picking, but sustainable investing is a lower priority in the firms’ philosophies,” the report said.

The firms that landed in the Leader class largely were small, dedicated shops with a high percentage of assets in ESG-focused funds, according to Morningstar. Robeco was the only one of the firms that landed the Leader label that offers non-ESG-focused funds.

“Small firms tend to have an advantage when it comes to building a strong culture of sustainability, nimbly adapting to an evolving sustainability landscape, and advocating for progress on sustainability issues at investee companies through activities like filing and co-filing shareholder resolutions,” the Morningstar report said.

By and large, firms’ ratings did not budge from when Morningstar performed the evaluation two years ago. The exceptions were UBS Asset Management, Royal London and Alphinity, which all leapt up a level from Basic to Advanced, and Comgest, which dropped from Advanced to Basic.

The asset managers in the evaluation came from the United States, the United Kingdom, Australia, Continental Europe and Singapore. Morningstar’s evaluation demonstrates that European asset managers are a step ahead of others globally on ESG matters with more than half of those measured from Continental Europe earning either the Leader or Advanced rank. Meanwhile, more than half of 39 U.S. firms evaluated landed in the Basic category and 12 merited only a Low rating.

“U.S. asset managers have long taken a strict shareholder value approach to their dealings with company boards and management in part because of the narrow definition of fiduciary duty in the U.S., which requires that managers focus on maximizing financial returns for shareholders,” according to Morningstar. “This contrasts with the European view that fiduciary responsibility encompasses a broader range of issues, including the impact of companies on the environment and society at large.”