Asset managers have responded to a growing demand from investors for socially responsible investing, with pledges to integrate environmental, social and governance factors into the way they invest. But investors are skeptical that companies are making as much progress as they say.

More than three-quarters (77 per cent) of Canadian institutional investors believe companies are overstating their ESG progress and 82 per cent expect to see increased litigation involving companies not delivering on ESG promises. Eighty-five per cent of global institutional investors are in favour of mandating ESG disclosures.

In that environment, it’s particularly important for defined contribution plan sponsors to be able to assess investment managers’ progress in their sustainable investing journey, said Satwik Misra (pictured left), director of institutional business development and client relationships for Ontario at Sun Life Global Investments, during Benefits Canada’s 2022 Defined Contribution Investment Forum in January.

Read: COP26 highlighting importance of ESG, disclosure for institutional investors

“Applying an ESG lens to manager oversight will increasingly become a strategic imperative,” added Adelina Romanelli (pictured right), manager of responsible investing at SLGI Asset Management Inc., also speaking during the event. She said it’s a natural extension of manager due diligence “in that it helps us navigate and evaluate our managers’ ability to continue to deliver upon their added value proposition.”

Romanelli said manager assessment evaluations can be broken down into two key pillars. Organizational resilience involves looking at how the firm will both adapt to responsible investing demand and thrive in the years to come even while facing normal challenges like calls for transparency, low rates and a battle for talent. Meanwhile, evaluating the breadth and consistency of return drivers involves looking at managers’ access to a broad range of ESG information and the systems and tools they have in place to review it, as well as how they foster cognitive diversity.

SLGI’s ESG governance approach involves evaluating asset managers on their commitment, strategy implementation and active stewardship. Commitment can be assessed by understanding the asset manager’s “sustainability premise” and the actions it plans to take to meet its goal; the governance and oversight of the strategy; the resources, tools and data sources the firm is using; and how it’s upskilling its workforce to increase capabilities. Romanelli said DC plan sponsors can look for key performance indicators embedded in incentive plans and specificity in the data sources managers are using.

Read: Sun Life launching ESG framework for pension plan sponsors

Asset managers that are leading on strategy implementation will have introduced “materiality mapping” of relevant ESG factors for sectors and regions, as well as a focus on transparency and outcomes.

When it comes to active stewardship, Romanelli encouraged plan sponsors to review the resources allocated by managers, whether the firm is proactive on its advocacy with portfolio companies and whether it has a “systemic orientation” that feeds into its strategic initiatives.

Resources aren’t about a specific number, she added, but about what the manager has done to accurately assess its strengths and gaps and how it’s working to fill those gaps and build capability and expertise.

“Corporate engagement, when done efficiently and effectively, can really lead to wealth maximization over time. . . . We have observed those that are committed [are] able to provide a lot of precision to say how their process evolves, how they start an engagement and how they escalate.”

Read: UTAM looks under the hood at investment managers’ ESG approaches

DC plan sponsors can begin their engagement with managers by first developing their own principles and beliefs and embedding them in their investment processes, said Romanelli. As an example, she explained how SLGI recently engaged with a few of its asset managers on “somewhat controversial” proxies where they voted for board directors that SLGI expected them to vote against, as part of its commitment to human rights issues.

“Hold your managers to a higher standard with respect to responsible ownership. . . . And understand how they’re progressing, taking accelerated action, beginning with how they’re building credibility.”

Read more coverage from the 2022 Defined Contribution Investment Forum.