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Aon Introduces Qualitative ESG Ratings for Buy-Rated Funds

Written by Meredith Jones

Meredith Jones is a Partner in Aon’s Global Investment Center leading Responsible Investment, emerging and diverse manager initiatives and is based in Nashville, TN.

As Responsible Investing (“RI”) continues to gain traction among institutional investors globally, Aon continues to expand our RI client toolkit to help to meet a diverse set of investor needs in this rapidly-developing area. In a recent survey1 of institutional investors, Aon discovered that just over two-thirds of the investors polled believe that the onus for Responsible Investing falls to the outside investment managers with whom they place assets. Not surprisingly then, Aon has increasingly been asked for input on whether and how well investment managers integrate Responsible Investment considerations, and more specifically Environmental, Social and Governance (“ESG”) data, into their investment strategies.

To best serve our clients’ desire to understand how non-financial ESG data may (or may not) be accommodated by various outside investment managers, Aon has developed a distinct ESG rating system for buy-rated investment strategies. The rating is completely separate from existing strategy and operational due diligence ratings, and serves to provide an added dimension of fund analysis for clients who have embraced, or are considering, ESG and RI within their investment policies. At this time, the strategy’s ESG rating is not designed to have an impact on the overall rating of Buy/Qualified/Sell ratings.

Aon’s ESG ratings are based on a variety of qualitative factors.
  • We start the process using a proprietary ESG due diligence questionnaire populated by fund managers.
  • At the same time, we conduct a review of managers’ RI-related policies and procedures, including a review of their Responsible Investment policy (if available), active ownership, proxy voting and/or stewardship policies, and we look for real-time examples of these policies in action. The mere presence of an RI or proxy voting policy that covers ESG is not sufficient to guarantee a high rating. In fact, we’ve found a wide array of policies at various firms, from a simple sentence (“We strive to incorporate ESG data into investment decisions”) to detailed, multi-page documents outlining a variety of use-cases, reporting lines and exceptions. Due to the extreme ranges of policies and procedures utilized by investment managers, we have concluded that detailed qualitative reviews are required for each fund/strategy, rather than a “check the box” approach.

Aon also considers additional factors such as dedicated personnel senior executive buy-in and compensation of staff based on ESG integration, as well as engagement in “best practice” organizations such as the United Nations Principles for Responsible Investment (“UN PRI”). After a thorough review of the available materials, data and policies, as well as conversations with managers, the lead researcher will award an ESG rating, subject to peer review, using an agreed reference framework. Ratings will be updated as necessary to reflect any changes in a fund/strategy’s level of ESG integration and developments across the broader RI landscape.

ESG ratings are currently being deployed for buy-rated long-only equity and fixed income strategies and will be rolled out to liquid alternatives, private equity and real estate throughout 2018. Like our investment strategy ratings, ESG ratings are assigned on a 1 to 4 scale, and may be interpreted as follows:

You will find Aon’s Responsible Investment Policy on our website by clicking here.

Click here for index descriptions.

[1] Aon’s Global Perspectives on Responsible Investing, June 2018

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