ESG Evolution: One Firm’s Response

July 2020

I.    Background

ESG investing principles are in Acadian’s DNA. We were a first mover in the area. Our efforts date back to the 1990s, when we incorporated corporate governance metrics into our quality signals for emerging markets. A decade and a half later, in 2009, we became the first systematic investment manager to sign the UN Principles for Responsible Investment (PRI). 

We’ve now been managing to ESG considerations for nearly 30 years. We’ve integrated an array of ESG factors into our core investment process, the product of a well-established and extensive research program into signals that further our clients’ sustainability and investment objectives. Moreover, nearly 50% of our AUM incorporate customized, client-driven ESG implementations, from basic exclusionary screens to carefully engineered portfolio tilts. We are committed to offering our clients distinctive, precision tools to achieve their ESG goals.

II.    Mega Trends

The UN PRI has enjoyed remarkable growth since its launch in April 2006. More than 500 asset owners representing $23.5 trillion of assets are now signatories as are more than 3,000 asset managers who invest $103 trillion on their clients’ behalf. Investments managed under the PRI have grown by 20% per year, and there is no sign that trend is slowing.

As investors have become more sophisticated about ESG, with deeper and more nuanced understanding of the issues at hand, we are committed to maintaining a leadership role to ensure that we can solve for their concerns and meet their objectives, rather than simply checking a box. We are monitoring a number of trends and issues as ESG becomes ever-more important to allocators around the globe:

Green-washing: Given the attention and demand for sustainable investments, it’s no surprise that asset managers have rushed to overstate the materiality and effectiveness of ESG offerings. Most strategies in the marketplace represent little more than rebranding exercises. In contrast, we hold ESG-related elements of our investment process to rigorous efficacy standards before including them in our forecasting models and portfolio construction.

Climate change to the forefront: As the degree of environmental and climate concerns has grown rapidly among asset owners, investment managers are generating an awful lot of noise regarding their responses. At Acadian, we integrate environmental elements into our core investment process, for example, carbon emissions, and we are excited about our research on environmental-related investment signals and risks.

Implications of COVID: We expect that the COVID crisis will increase the urgency around sustainable investing. In a world that has been so dramatically transformed by the pandemic, we are confident that investor focus on issues such as health and safety, working conditions, and equitability will endure.

ESG reporting: This is an increasingly important priority for investors, even if it doesn’t often make headlines. We provide our clients with extensive ESG-related reporting, including regular updates on the carbon profile of their portfolio. We will build further on these capabilities as our clients’ interests continue to evolve and diversify. We evaluate environmental, social, and governance characteristics individually, as well as stock-specific drivers, and proactively communicate around the latest regulatory requirements and developments.

Impact investing: This area is attracting increasing attention from investors and academics alike. Our critical global challenges require innovation, and capital markets have an important role to play—as a catalyst for good. The notion of investing in companies that set out to provide a positive social and environmental impact while also generating an attractive financial return is not a passing fad, and the momentum behind the movement is reaching a fever pitch. I’m especially interested in this area because it aligns Acadian’s social and fiduciary objectives.

III.    Acadian’s Lens

In reexamining what’s required to stay at the forefront of ESG investing in 2020 and beyond, I would highlight three key themes:

Engagement: We are committed to engaging with companies on ESG-related matters and to the ongoing assessment of our own impact as a sustainable investor. We communicate with our clients about proxy voting, including the rationale behind ballots cast on E, S, and G issues, and we provide updates about our corporate engagement practices. Additionally, we conduct both collaborative and direct engagements on environmental, social, and governance issues, often focused on encouraging companies to compile and report ESG-related data, which enables investors to make more informed investment decisions. Beyond disclosure practices, we engage with companies on a range of E, S, and G business practices that we believe are material, such as employee well-being.

Custom solutions: In ESG investing, our efforts have long been driven by client needs, from launching the first systematic carbon-sensitive Emerging Markets strategy to implementing strategies with bespoke, targeted engagement programs. A sophisticated, systematic investment process, like Acadian’s, is ideally suited to customization, a capability that has become especially important as relevant principles and outcomes have become increasingly diverse. ESG and sustainability mean different things to different investors around the globe, and asset owners’ focuses and goals depend on both where they’re located and what type of investors they represent. Our spectrum of ESG capabilities and the flexibility and precision of our process allow us to align with their interests and tailor solutions accordingly.

Embrace of ESG’s complexity: Commitment to ongoing research is central to our investing philosophy, and ESG is no exception. We hold ESG research to the same rigorous standards that we apply to any other investment process enhancements, and these projects often pose special challenges. Non-traditional data sources have become increasingly important, so we proactively seek them out. But ESG data tends to be noisy, incomplete, and inconsistent across sources. Moreover, the relationships between ESG-related characteristics and other company attributes are often complex, and the payoffs to ESG signals may be sporadic, asymmetric, or tangled with region and industry-specific factors. These are just a few examples of the considerations that researchers have to keep in mind when identifying, testing, and implementing sustainability-related signals. In order to generate value for clients in ESG investing, we must meet these challenges head on.

As ESG themes and associated data rapidly evolve, we continue to look for new ESG ideas to complement and enhance our investment process. Sustainability-related intangibles, from employee welfare to board governance, to carbon emissions and beyond, can materially impact a company’s share price, so it stands to reason that accounting for such issues can benefit our investors.

Looking ahead, we are committed to remaining a leader in solutions-oriented and ESG investing. We have the resources, innovativeness, and investment process to serve our clients’ diverse sustainable investing needs. We have a track record of doing so, and we would welcome the opportunity to engage further with investors about this exciting sphere of investing. In coming weeks, I look forward to sharing more about Acadian’s work to evolve as a sustainable organization and how we uphold responsible and sustainable investing values as a firm and promote them from within, from diversity and inclusion efforts to our commitment to our community and beyond.