- UK asset managers lead all other major markets globally for incorporating E, S and G activity into operations and disclosing ESG metrics – far outstripping the US
- Larger UK asset managers significantly outperform boutique firms on conducting and reporting ESG activity
- UK asset managers rank highly at a global level for having fair and competitive remuneration packages
According to the EY Sustainable Finance Index, which ranks publicly listed financial services firms across the world on ESG activity and disclosure metrics, independent UK asset managers – with total AUM of £2.5trn – are the leading major market for incorporating environmental and societal practices and governance systems into their operations, and come fourth across the world for their rate of disclosure against such activity.
The EY Sustainable Finance Index is a global benchmark comparing over 1,100 publicly listed financial services firms worldwide on ESG metrics and disclosure rates, which act as key indicators of activity and commitment to improve. The Index collates reported data across a wide range of sustainability metrics and assigns a score out of ten on progress towards goals, as well as measuring the extent of disclosure on activity, expressed as a percentage.
In reported 2019/20 data, the listed UK asset management market scored 6.6 out of a possible ten for the ESG activity it is currently carrying out and reporting on. This compares to the global average of 5.6, and while comparatively progressive, it demonstrates the extent of work still to be done across the asset management world on sustainability. Against over 200 parameters tracked by the Index, UK asset managers’ rate of disclosing ESG data is 60%, which is higher than the global benchmark of 50%, and places the UK in the top five markets globally. The parameters range across the ESG spectrum, capturing data such as CO2 emissions, firms’ HR policies and board-level independence and governance structures.
Gill Lofts, UK Sustainable Finance Leader and Head of Wealth and Asset Management at EY, comments: “The UK has long been recognised as one of the best places in the world to do business, which is partly due to its heritage of strong corporate governance, industry codes and regulation. The asset management industry should be commended for its governance structures and the progress made to date on the environmental front, but this Index demonstrates that across all business, for a greener tomorrow, there remains a path to be travelled.
“The Stewardship Code has driven material progress on ESG disclosure from UK players, and the Bank of England’s emphasis on supporting the transition to a carbon neutral economy, as well as the recent calls from the Chancellor for the City to be a leader in green finance, highlight that there is momentum and motivation. Alongside regulation and government-led initiatives, we are increasingly seeing firms challenge themselves to change how they operate and align more positively to ESG metrics – we must maintain momentum here to drive lasting progress.”
Karl Meekings, Global Financial Services Analyst at EY, adds: “Disclosure is a strong indicator of progress on sustainable finance. It suggests that firms are acting to meet ESG goals, are willing for their efforts to be scrutinised, and are committed to making further improvements – good signs for the future. However, ‘good’ is still a low benchmark and there is significant progress to be made before any asset management market can claim triumph. Smaller firms, in particular, have some catching up to do with their larger peers.”
UK ranks 7th globally on diversity and inclusion in the workplace
D&I is a cornerstone of the ‘S’ in ESG, and progressive policies to encourage a more diverse and inclusive asset management sector are urgent. The Index rankings are based on factors such as the policies and targets in place on diversity, opportunity within the workplace and the gender balance of managerial roles. When looking across the global market, Norway was the highest scorer, achieving 5.1 out of a possible 10 for its D&I activity, which compares to the UK’s 3.9 score and US’s 2.3 score.
Improving the gender balance is a clear priority for the asset management sector. In terms of board diversity, women currently make up 33% of UK board members. This compares to 44% in Norway and 43% in France. In terms of ambitions, according to the Index, 30% of UK asset managers currently set diversity targets, which compares favourably to 20% at German firms, but lags others, including the Swiss market, where 40% of firms have such targets.
Julian Young, UK Asset Management Assurance Partner, comments: “Asset managers know they need to dial up change on their industry-wide gender imbalance. It is well-acknowledged that diverse teams drive stronger performance: it is not only the right thing to do, but it makes commercial sense. There are numerous ways to support this, with flexible working high on the list. Post-pandemic, the argument for more traditional working models has weakened, as many functions proved that they could operate to the same high levels virtually. With strong evidence to support the claim that flexible working can result in more women achieving and being retained at senior levels, this is a key area asset managers should look into.”
UK ranks highly for fair and competitive remuneration process
The UK asset management market scored nine out of a possible ten for aligning salary to role and for comprehensively benchmarking pay within the market. Within the top ten leaders for fair and competitive remuneration, the only non-European market was China (scoring 9.8). Meanwhile, the US scored 7.6 out of ten.
Taking a sustainability lens to executive compensation policies, 65% of UK firms were found to align executive pay with ESG performance, compared with 40% in France and 20% in Germany and Switzerland.
Listed UK asset managers have significant work to do on environmental policies
Multiple challenges remain to be addressed on the environmental front for the listed UK asset managers covered by the Index. The UK market scored 4.8 out of 10 on these metrics, and a has a disclosure rate of 33%. This compares to France’s environmental score of 3.8 and a 38% rate of disclosure, and Switzerland’s 3.5 score and 29% disclosure rate – although it should be noted that the sample sizes are smaller for both markets. However, UK firms outstrip their US counterparts, who scored 1.9 on environmental activities with a 16% disclosure rate.
The Index found that 70% of UK asset managers report their environmental AUM – a figure which is 60% in both France and Switzerland. This possibly reflects UK actions such as the development of the Green Finance Strategy, aimed at increasing companies’ ESG disclosures, and the FCA’s 2020 introduction of stricter climate risk reporting rules. However, just 22% of UK firms (40% in France and 20% in Germany and Switzerland) report making proactive investments in their environmental decision-making capabilities.
More than half of the UK asset management firms covered in the Index do not report on key physical footprint measures, including waste levels or energy consumption, and none of the firms report their environmental expenditures. None of the listed UK managers in the Index report having active recycling programmes or initiatives to reduce environmental impact – mirroring a similar story for Germany and Switzerland. Further, 17 out of the 23 firms in the UK Index do not report having any environmentally friendly or green sites. Only three out of the five French and Swiss firms included in the Index were found to have environmentally friendly offices – with just one of five German firms in the same position.
Gill Lofts comments: “As the stewards of the global flow of capital, wealth and asset managers have a unique role to play in the greening of financial markets. The sector as a whole has a societal responsibility to positively influence the investor community they serve and advise, and to ensure their entire supply chain operates sustainably. For the most tangible improvement on the green agenda, UK asset managers still need to increase their focus on positive climate change action – and to report on it more comprehensively. There are of course discrepancies within the market, as many smaller players are unable to allocate the same level of budget as their larger peers to drive progress, but they hold the advantage of being nimbler and quicker to market. So, with the same end goal in mind, every firm can play a part in creating a more sustainable tomorrow.”
Karl Meekings concludes: “Although UK asset managers have more to do across all ESG activity and reporting, it would be wrong to suggest there isn’t a lot of positive work in progress and strong ambitions for the future. Governments across the world – with the UK amongst the leading voices – have made it clear that the future must be greener and that financial institutions play a fundamental role in achieving that. At the national level, the UK is on the brink of launching its first green sovereign bond and a green gilts programme, but we shouldn’t forget that change must also be made at a firm level, where the sum of many small changes can result in large scale positive progress.”