CALLAN

INSTITUTE June 2016

Survey

Asset Managers and ESG

Sensing Opportunity, Bigger Firms Lead the Charge

Environmental, social, and governance (ESG) investing is not a new phenomenon, but it has been expe-

riencing rapid growth and change in the U.S. marketplace. To better understand how asset managers are

addressing investors changing needs in this space, Callan queried these firms on their ESG views and

policies. Our survey reveals that the majority of large asset management firms are formalizing their efforts

around ESG implementation, via firm-wide policies, third-party affiliations, and other actions, while smaller

firms have yet to exhibit widespread adoption.

Firms with
a formal
ESG policy 73%
(by size)

51%

23%

small: <$50bn
medium: $50bn $250bn
large: >$250bn

Small Medium Large

Knowledge. Experience. Integrity.

 Has your firm signed the

41%
Principles for Responsible
Investment (PRI)?
of all respondents have a
40% Yes
formal ESG policy
53% No
7% Not Sure

Results reflect responses from 180 asset management firms representing more than $42
trillion in assets under management (AUM). While more than half of asset management

35%
firms (56%) do not have a formal ESG policy, and a similar percentage (53%) have not
signed on to the United Nations Principles for Responsible Investment (PRI), the firms
that have pursued these initiatives cite growing client demand as the primary motivation.

of firms with no ESG policy

have considered adopting one For this survey we examined managers by size groups: small (less than $50 billion),

within the last year
medium ($50 - $250 billion), and large (greater than $250 billion). A greater proportion of
large firms (73%) versus small firms (23%) have a formal ESG policy at the firm level (as
opposed to on a strategy level). The same trend is true for PRI signatories: 82% of large
firms versus 20% of small firms. Further, larger firms tend to be more established in the
space: more than one-quarter (27%) of large firms created their ESG policy more than a

59%
decade ago, compared to 21% of medium firms and 16% of small firms.

cite client demand

as their reason for Large 36%
adopting ESG
ium 42%
Med
ll 62%
S ma
Part of being a sound fiduciary
%
21%

16

was another popular reason for

adopting ESG with
56% When was your
firms ESG policy
27%

established?
26% of those not adopting
22

ESG feel ESG factors are already

%

accounted for in their current

investment process 37 % %
37
Note: Multiple responses allowed.

Within past 2 years

310 years ago
> 10 years ago

2
What research process is Managers with an We also posed questions around research

utilized at your firm? ESG Policy by processes and discovered that firms with
fundamental, bottom-up research are less
Research Process
likely to have a formal ESG policy (33%) than

53% those with a quantitative approach (53%) or

10%

Quantitative
that use a combination of research processes.

31% Research organization also mattered. Asset

59% management firms that implement a multiple
boutique model are more likely to have a
formal ESG policy (59%) than those with
centrally organized research (45%) or team-
51%
Combo
based approaches (36%).

Respondent Perspective

Quantitative, factor/model
driven approach
We believe that responsible
investing is a core component of
33%
Fundamental

Combination of fundamental &

quantitative traditional investing. Governed,
sustainable businesses have
Fundamental, bottom-up research*
the potential to generate strong
* this includes basic screening results over time.

How is research organized Managers with an ESG Policy by

within your firm? Research Organization
59% Multiple boutique 45% Central 36% Team-based
11%

29%
60%

Multiple boutique model

Central research platform

Team-based approach

Knowledge. Experience. Integrity. 3

Looking forward, all sizes of asset management firms expect client interest in ESG
investing will grow. However, just 41% of the respondents see this marketplace shift as an

41%
opportunity. Again, larger firms tend to be more optimistic about future growth, with nearly
100% sensing slight or significant increases in client interest.

Asset managers that project growth in client interest expect to see that interest coming of respondents say ESG
from the U.S. and Canada (72%) and Europe (57%). This reflects the survey respondent strategies present a market
population, who are primarily based in the U.S. and Europe, but may also reflect the notion opportunity going forward
that European investors are further along in integrating ESG into investment decision
making than their North American counterparts.

Over the next 3-5 years, how do you expect Respondent Perspective
client interest in ESG to change?
We believe that environmental,
100% social and governance (ESG)
88% issues play an important role
76% Increase in the global economy, both
Significantly
from a business and investment
perspective.

Increase Incorporating ESG factors

Slightly into the research process
is part of ensuring all risks
and opportunities that could
Small Medium Large
influence the growth potential of
the company in question have
been considered.
Where is this increased interest likely to come from?*

U.S. and
72% Around one-third of managers
Canada
with a formal ESG policy
Europe 57% expect it will help them
achieve higher risk-adjusted
Asia 16%
returns and improved risk
profiles over the long term
Emerging 5%

Australia 4%

* Multiple responses allowed.

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 We provide further detail on the demographics of respondent firms for reference. Rough-
ly half of the 180 asset management firms that responded to our survey are small (less

96%
than $50 billion in assets), and around a quarter are either medium ($50 $250 billion)
or large (greater than $250 billion). Respondent firms had a median of $56 billion and an
average of $232 billion in AUM. The vast majority of respondent firms actively manage
of respondents are their strategies (96%). As one would expect, the smaller respondent firms manage fewer
active managers unique strategies.

Key Takeaways
For asset management firms, its clear that size matters when it comes to ESG in-
tegration. Large firms are more likely than smaller firms to have formal, firm-wide

Size
ESG policies, be PRI signatories, and have significant expectations of growing client

matters
interest in the space.

larger asset management Respondents by Size

firms are taking more
actions on ESG

53%
25% 22%

Small Medium Large

<$50bn $50bn $250bn >$250bn

How many unique strategies does your firm manage?

5%
26% 100%
30% 0-5
6 - 10
29% 11 - 25
65% Over 25

37%

8%

Small Medium Large

Knowledge. Experience. Integrity. 5

 About The Author
Mark R. Wood, CFA, is a Vice President and U.S. equity investment consultant
in Callans Global Manager Research group. Mark is responsible for research and
analysis of U.S. equity investment managers and assists plan sponsor clients with
U.S. equity manager searches. He meets regularly with investment managers to
develop an understanding of their strategies, products, investment policies, and
organizational structures. As a member of Callans ESG Committee, Mark covers
matters related to sustainable investing. Mark joined Callan in 2013.

Prior to joining the Global Manager Research group, Mark worked as the Senior Research Analyst for Cook
Street Consulting, Inc., a boutique consulting firm based in Denver, CO. He was responsible for investment
manager searches and due diligence for U.S. equity, fixed income, and target date asset classes.

Mark graduated from the University of Colorado, Boulder in 2007 with a BS in Finance and Business
Administration. He has earned the right to use the Chartered Financial Analyst designation.

If you have any questions or comments, please email institute@callan.com.

About Callan Associates

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2016 Callan Associates Inc.

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