Environmental, Social, and Governance (ESG) has been a growing focus for Asset Managers over the past few years going quickly from Alternative data to Essential in the overall investment process. The continued appetite from investors and a changing regulatory landscape have all contributed to estimates that ESG will surpass $41 trillion in 2022 and $50 trillion by 2025.
Background on SEC Proposals – “the Other Shoe Has Dropped”
In May, the SEC published a trio of intertwined ESG proposals concerning corporate climate risk disclosures, fund names (including ESG), and enhanced fund and investment adviser ESG disclosures, echoing similar regulatory measures proposed or enacted in jurisdictions around the world. For those of us in the industry who had been “waiting for the other shoe to drop,” it dropped.
Importance of Engagement within ESG Investing
The importance of engagement in the ESG investing context is not news to anyone. The development of stakeholder capitalism, the proliferation of stewardship codes, and the emergence of engagement requirements for institutional investors and asset managers are global phenomena. One can cite measures such as the French Energy Transition Law, Shareholder Rights Directive II, UK Stewardship Code, and ESG disclosure guidelines from multiple fund regulators worldwide. The SEC proposal on fund ESG disclosures is intended to combat greenwashing and increase the availability of comparable and decision-useful information for investors.
While the SEC fund ESG proposal* resembles analogous fund regulations worldwide, it subtly elevates the role of engagement in ESG investment strategies. The SEC fund ESG proposal allows funds to pursue an “engagement only” ESG investment strategy—without requiring divestment, ESG screening or portfolio tilts to qualify as an ESG fund. This is an important enabler for passive funds with ESG aims.
The SEC’s definition of ESG-Focused Funds cleanly delineates between funds that use one or more ESG factors as a significant or main consideration 1) in selecting investments or 2) in their engagement strategy with the companies in which they invest. The use of the conjunction “or” in this sentence differentiates the SEC’s approach from most approaches in which engagement is one component of a broader ESG investing strategy rather than the whole strategy.
Disclosures
Like much Sustainable Finance regulation globally, the primary mechanism of the SEC fund ESG proposal is disclosure. The SEC proposal, for example, neither requires funds to pursue ESG investing strategies nor spells out definitions of “ESG,” “green,” “sustainable,” or “responsible.” Under the proposal, ESG investing strategies can be freely pursued or not. If pursued, such strategies can be accomplished as defined and disclosed by funds.
The global adoption and proliferation of voluntary and mandatory shareholder engagement activities by institutional asset managers has driven demand for robust and versatile systems to enable compliance and the effective pursuit of engagement strategies with defined and measured objectives and outcomes. As with any disclosure regulation, the regulation of ESG engagement disclosures activates a host of operational and compliance requirements peripheral to disclosure itself—from policies and procedures to controls, communications (internal, client, and stakeholder), data management, and record-keeping. In short, while the SEC fund ESG proposal allows engagement as a freestanding ESG investment strategy, regulation increases the need for systems that enable the strategy to be pursued efficiently and consistently at scale.
FactSet RMS - New Tools for New Rules
By working with scores of clients in this developing activity with raised compliance stakes, we have uncovered common themes across system requirements to address shareholder engagement workflows, which we characterize as shareholder engagement management systems. Indeed, engagement management systems represent something of a cottage industry, with multiple startups entering the space.
Over the past year, we are seeing more clients document their internal ratings and company engagement using FactSet’s Research Management System. Whether for record-keeping or to do further analysis in their ESG analysis, we are seeing more workflows created around:
- ESG Research and Ratings
- ESG Engagement and Meeting Tracker
- Identify emerging ESG issues and topics for engagement with custom or standard frameworks like SASB, SDG, etc.
- Proxy Voting Documentation
- Assess proposal trends aligned with ESG themes and predict how funds and investment institutions will vote on proxies at public company meetings
- Impact Reporting on Outcomes based on Engagements
- Clients are creating simple and advanced reporting options based on their engagements. Common environments include default views/reports within platform, Excel/Office reports, along with leveraging connectors to data visualization software like Power BI and Tableau
ESG Engagement and the Need for Engagement Management Systems
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The standard components of today’s shareholder engagement management systems tie together the research, insights, efforts, and results of a range of users across the institutional asset manager’s organization, from research analysts to ESG or responsible investing teams to portfolio managers and performance and reporting teams.
This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.
* Fully titled, “Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices.”
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