As well as providing high-level comparisons between different countries and sectors, the Index allows us to take a deep dive into asset managers’ sustainability disclosure and reporting. Our analysis identifies three key areas where the wealth and asset management industry should focus to accelerate its progress on sustainability.
1. Asset managers must take a lead on environmental disclosures
Research from the 2020 EY Climate Change and Sustainability Services (CCaSS) Institutional Investor survey showed that 72% of investors now carry out structured reviews of ESG performance, compared with just 32% in 2018. Asset managers may be stepping up their demands for transparency from investee companies, but the Index shows that significant shortcomings remain in their own reporting. For example, despite their growing focus on climate change, just 30% of European firms set targets or objectives related to emissions reduction.
Looking at environmental factors more broadly, 30% of UK asset managers do not report their environmental AUM and this figure rises to 40% in France and Switzerland. This may be due to 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, as recommended by the TCFD. It is also notable that just 40% of asset managers in France, 22% of UK firms and 20% of those in Germany and Switzerland report making proactive investments in their environmental decision-making capabilities.
The implementation of SFDR should lead to better environmental social disclosures at the entity and fund level, but asset managers must go beyond regulation if they are to take a position of leadership. One opportunity is for firms to improve the environmental footprint of their supply chains. The Index shows that less than a fifth of French, German and British firms say they use formal environmental criteria when selecting suppliers or sourcing partners.
2. Improving D&I, including gender balance
European asset managers’ average social disclosure rates are slightly higher than the global equivalent (56% v. 51%) but still have further room for improvement, particularly enhancing the disclosures around diversity and inclusion (D&I). In part, this reflects the lack of consistent European regulation around D&I, with stronger regulation around D&I disclosures in France, Norway, Sweden and the UK than in countries such as Germany and Spain4.
Improving the gender balance is a particular challenge for the industry. Globally, the average proportion of female employees within wealth and asset management is 43%. Female representation is similar in Europe, where 42% of asset managers’ employees are women. Furthermore, entry-level imbalances are more accentuated at the industry’s more senior levels. UK and French wealth and asset managers fare relatively well on D&I, with greater reporting and a higher proportion of females in managerial positions. Globally, just 25% of asset managers’ board and executive staff are female and European representation is only slightly better at 31%5.
The Index shows that industry leaders are already investing to improve their gender balance. Examples of the areas of progress include childcare provision and flexible working, which enable working parents to manage the demands of work and home life. About a quarter of UK firms and a fifth of those in Germany and Switzerland report providing day-care facilities for their employees.
While about three-fourths of UK and 60% of French firms offer flexible working hours to their employees, globally less than half of asset managers in our sample report offering flexible working hours or working patterns. One area for improvement would be to set dedicated diversity targets across hierarchies. Just 40% of Swiss firms and 30% of UK asset managers we analyzed set diversity targets and the figure in Germany is even lower at 20%. Collecting and monitoring a wider range of diversity data – even if much of it could not be made public – would help create part of the wider picture of a more gender diverse asset management industry.
3. Enhancing sustainability governance
The Index reveals several areas where asset managers could improve their sustainability governance.
- Compensation: On average, 50% of European asset managers report having ESG-linked executive compensation policies in place. However, there are significant national variations, with 65% of UK firms in our sample aligning executive compensation with ESG performance compared with 40% in France and 20% in Germany and Switzerland. Asset managers should focus on disclosing information around ESG KPIs in their executive compensation policies. The SFDR should also encourage asset managers to set remuneration policies that are aligned with sustainability risks.
- Reporting: One area where asset managers could take quick action to enhance ESG governance is the scrutiny of their own sustainability reporting. Just 24% of European firms currently have their corporate social responsibility (CSR) or Sustainability reports reviewed by an external auditor. This drops to 21% of UK firms, while none of the Swiss firms in our sample report having their CSR report externally audited.
- Succession: Despite the importance of succession planning in asset management, 21% of the firms in our sample do not report planning for the succession of executive managers such as key board members. In the UK, however, this figure falls to just 4%.
As wealth and asset managers continue to implement SFDR, they can apply lessons learned to strengthen their own sustainability governance. Implementing SFDR has shown that a clear understanding of each firm’s ESG strategy and level of ambition, backed up by verification of their current ESG risk management and data frameworks, are vital to enhancing governance and driving forward tangible improvements in sustainability performance.