“I get contacted all the time by people that want to work in ESG, but have no experience or suitable qualifications,” says Sabine Chalopin, head of ESG, sustainable infrastructure at investment firm Denham Capital, flagging a concern commonly expressed by managers. “Resourcing is definitely a challenge for building sustainability teams.”
A pronounced cultural shift may be underway across the industry, driven largely by the sustainability agenda. But lack of ESG expertise is slowing progress, and this contradiction is at the heart of why many managers say fully integrating ESG will take time and requires patience.
“The ESG pool of talent is very small compared to other sectors,” says Dan Watson, head of sustainability at manager Amber Infrastructure. “It is a vocation that has seen huge growth over the last couple of years, and drawing diversity from an already tiny pool of talent can be particularly difficult.”
Today, managers take very different approaches to organising teams and sourcing ESG expertise. One model is to outsource specific ESG activities to external third-party consultants that are better equipped to deliver a high-quality ESG programme. This allows different ESG workstreams to be covered with support from experts in the field.
Mid-market manager Northleaf Capital Partners has an ESG committee but engages with external expertise, particularly environmental consultants, during the due diligence process. Every prospective investment is analysed for climate change risk and opportunities, with the results of these assessments presented to the manager’s investment committee. The firm also adopted the Climanomics platform, in partnership with The Climate Service, which enables climate-related risk reporting and disclosure aligned with the TCFD.
“Resourcing is critical to the success of ESG integration and responsible investment programmes”
Stafford Capital Partners
Another approach is to outsource most ESG-related work, but install an ESG committee internally, ideally reporting to the CEO. “Most investors and fund managers are not yet fully resourced for full ESG integration and typically have one to two staff dedicated to ESG, with the larger ones being better staffed,” says Patricia Rodrigues, an ESG specialist who sits on the boards/committees of a number of infrastructure fund managers, including African Infrastructure Investment Managers and GLIL Infrastructure.
Starwood Energy Group is one infrastructure manager that has taken this approach. Himanshu Saxena, CEO at the firm, explains that “while sustainability expertise is beneficial, we do not view it as a requisite given the partnerships we maintain with external advisers and consultants who regularly contribute to our strategy”.
Legal & General subsidiary LGIM Real Assets is another firm that relies on an ESG integration model based on cross-collaboration rather than committees. “We have a specialist team of six individuals with different and complementary expertise across sustainability and climate change,” says Shuen Chan, head of ESG at the firm. “Within the different funds, there are dedicated ESG champions who have the role of helping to drive forward the implementation of our ESG objectives.”
A duty of knowledge
LPs are looking to their investment managers for support on ESG, while asset managers are scaling their internal capability to meet these expectations. A survey from Triodos Bank earlier this year showed that 83 percent of polled UK investors now expect their fund managers to upskill employees on sustainability and environmental issues, while 85 percent want their managers to help avoid greenwashing claims from financial providers. Ninety percent of investors also stated they want their managers to conduct in-depth analysis into each portfolio company to guarantee that all investments align with their ESG criteria.
Kristina Kloberdanz, chief sustainability officer at Sydney-headquartered Macquarie Asset Management, says that LPs face the same pressures as GPs to demonstrate that they are incorporating ESG and sustainability into their investment decision making.
“ESG expertise is moving in-house, but this does not mean that all of the resources need to sit within the sustainability team,” she says. “As areas continue to develop with regulations, reporting standards convergence, net zero moving from commitment to execution plans, innovation and technology advances, there continues to be value in engaging with experts externally to ensure that we are best equipped to complement the expertise we have in-house.”
Indeed, it seems a best-of-both approach is a favoured method among managers. Silva Deželan, ESG director at London’s Stafford Capital Partners, says that probably the most common model adopted today is to have a dedicated in-house ESG expert, supported by an ESG committee and external advisers for specific topics and services.
Swiss fund manager SUSI Partners exemplifies this approach. “Our ESG committee is comprised of both ESG specialists and our co-CEOs, which reflects our conviction that such a committee needs both specialist expertise and senior sponsorship to position it adequately within the company,” says Raphaela Schmid, vice-president, sustainable investing at the firm.
But even after installing these ESG committees, top-down integration is not necessarily guaranteed. “Resourcing is critical to the success of ESG integration and responsible investment programmes,” emphasises Deželan. “However, without commitment from the top and acceptance in the organisation, a dedicated ESG resource alone will not result in successful ESG integration.”
Broader understanding of ESG goals across the business and educating all employees are critical pillars for triggering cultural change and long-term impact.
“I think more importantly, you need to train all staff to be ESG conscious, competent and have the appropriate culture and systems in place to drive integration across portfolio companies,” adds Rodrigues.
“There is no point having a well-resourced ESG team acting in a silo and producing beautiful marketing materials, answering ongoing LP queries and making submissions for ESG awards, but in practice not implementing key ESG measures across the portfolio.”