Why are Larger Fund Managers More Engaged on ESG than Smaller Ones?

Results from a recent survey show larger fund managers are more likely to make ESG a priority – so how can smaller firms catch up?

Impact investing is bigger than ever, with an estimated $17 trillion in assets going toward sustainable investing. We’ve discussed previously how the majority of that comes from institutional investors, and that interest in ESG may continue to rise as individual investors follow suit.

Now that we’ve looked at who’s investing in ESG, it’s time to take a look at who’s offering those investments. What can an analysis of the firms offering ESG strategies tell us about where the industry is at and where it’s headed?

Some useful data can be found in a recent survey from EY. Titled, “Are you exploring the future or just visiting?” this 2021 survey included PE firms from around the globe. The respondent profile shows they spoke to managers representing a range of firm sizes, organized by AUM:

Looking at the respondents’ answers grouped by size allows us to see if there are noticeable tendencies regarding ESG based on the amount of assets a manager oversees. The data presented in the EY survey indicates that managers with a higher AUM put more of their focus on ESG than smaller firms do.

Participants in the survey were asked, “What are your top strategic priorities?” 41% of managers with more than $15 billion in AUM and 29% of those with $2.5-$15 billion listed ESG Initiatives as a top priority. But for those with under $2.5 billion, only 14% listed ESG initiatives as a top priority.
In fact, 47% of managers with under $2.5 billion in AUM said they “don’t engage with limited partners on ESG topics,” compared to only 9% of those with over $15 billion in AUM who responded that way.

When it comes to internal ESG policies, the numbers speak for themselves. Note this key section of the survey, where participants were asked: “Who has an ESG policy?”

From these responses, we can see that larger firms are much more likely to see ESG Initiatives as a priority, to engage with their limited partners on ESG, and to have a specific ESG policy. Why is that? Surely it’s not because managers overseeing more assets are predisposed to caring more about ESG.

The EY survey indicates the answer might be more about corporate organization than anything else. Take a look at the following chart from the survey:

Larger firms are much more likely to have a dedicated ESG task force or Head of ESG than smaller firms, where ESG is often the responsibility of a single individual: the COO, CFO, Chief investment officer or senior portfolio manager, or even the Board of Directors. And 30% of those smaller firms have no one responsible for setting ESG priorities.

While larger firms have the manpower and resources to create dedicated divisions, managers with fewer assets under management are forced to place that responsibility in the hands of high-ranking individuals who are already overburdened and don’t have the time or resources to concentrate on ESG. Smaller fund managers may have just as much drive and passion for ESG as their larger counterparts, but find it difficult to accomplish as much as they’d like. So how can they catch up and compete with the larger managers dominating ESG?

Since it might not be feasible for smaller firms to create in-house ESG divisions, outsourcing can be the solution. The right third-party fund administrator can help managers delegate, provide vital expertise, and oversee the creation of ESG policies and investment strategies.

JTC Americas is a leader in the impact/ESG space, offering innovations like real-time impact reporting and pioneering practices to help investors compare impact across different investment types. JTC was also the winner of the “Fund Administration: ESG” award at the 2021 Drawdown Awards.

As investors continue to demand more when it comes to ESG, managers will have to respond by creating more offerings and making ESG a priority in order to remain competitive. At JTC, we work with funds of all sizes, and thanks to our global reach and purpose-built solutions, we can grow with you. By teaming up with JTC Americas and focusing on ESG now, you can set your fund up for success in the future.

Together We Grow

Learn more about our Impact Reporting capabilities and IRR® by downloading the JTC Impact Funds Collateral!