Why the role of asset managers is evolving in ESG

Asset owners rely to varying degrees on the emissions judgments of asset managers, but potential regulatory and reputational perils exist.
Why the role of asset managers is evolving in ESG

It’s uncontested that asset managers have an important role to play in terms of their basic fiduciary duty to their asset owner clients, but industry views are mixed on whether that role extends to the realm of ESG.

Marcia Ellis, a Hong Kong-based partner and global co-chair of the private equity practice at US-headquartered law firm Morrison Foerster, told AsianInvestor that “an asset manager putting itself forward as a gatekeeper for carbon emissions is stepping into the potential morass of greenwashing".

Marcia Ellis,
Morrison Foerster

“They're making themselves potentially responsible by saying, ‘I'm going to tell you which investments are truly green, which ones are truly going to achieve good decarbonisation metrics’,” she added.

She also highlighted that asset managers could face not just reputational, but regulatory and legal risks as well, if they adopted such a stance.

Instead, Ellis emphasised that leaning strongly into an emissions reduction agenda, such as some Asian state investment funds were doing, was preferable to asset managers “setting themselves up as targets.”

Deborah Ng, head of ESG and sustainability at GMO, framed the role of asset managers more in terms of ensuring that emissions considerations were part of the relationship between themselves and asset owners.

Deborah Ng, GMO

“We definitely have a role to play as gatekeepers, [but] it’s very much couched in terms of our fiduciary duty to earn the best returns for our clients,” she told AsianInvestor.

“We apply an ESG lens because that helps us to make more informed investment decisions with a view toward improved risk-adjusted returns.”


Like many asset managers, GMO has developed a methodology for estimating scope three emissions, those for which companies are indirectly responsible for up and down their value chains, and which are notoriously difficult to calculate yet which must be reported in a phased approach under the European Union’s Corporate Sustainability Reporting Directive (CSRD).

GMO’s Indirect Emissions Model uses companies’ reported scope one emissions, which are easier to estimate than scope two or three, in combination with an Organisation for Economic Co-operation and Development dataset to arrive at what Ng described as “the basic insight that everyone’s scope two and three emissions are someone else’s scope one emissions”.

Thomas Knudsen, director of ESG and impact investing at sustainability-focused, Singapore-headquartered single-family office Rumah Group, expressed scepticism over how well organisations were accurately accounting for their carbon emissions.


Thomas Knudsen,
Rumah Group

“Many corporates right now are struggling with their scope one and two, let alone their scope three emissions,” he told AsianInvestor.

“The quality of scope three, especially, is still a challenge. There are just things that an organisation may not have understood about how their supply chain was put together, or new data where they had previously made assumptions and so on," he added.

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Knudsen nevertheless sounded optimistic when it came to the limitations of the data, saying that acknowledging those limitations was a necessary part to overcoming them.

Ellis echoed that view, pointing to what she described as an emerging consensus on what data should be used in emissions estimates, and how.

“Now that we're starting to see accounting-related benchmarks, and once stock exchanges are requiring disclosure and accountants get involved, there will be increasingly clear guidelines and more alignment among markets, so I think the data problem is going to work itself out,” she said.


Ng said that in such a decision-making processes, asset managers’ most important role was educating both asset owners and portfolio companies.

“Some clients will have already set a target to reduce their portfolio carbon footprint intensity by X, and so you know right away what they're looking to achieve. Others are still at the beginning stages. Our role is to do that bit of education, that bit of, ‘OK, what are you trying to achieve?’ So, we have a role to play as gatekeepers, but even more as educators and facilitators and solution providers,” she said.

ALSO READ: Asian private equity firms grapple with tougher ESG demands

Ellis pointed to the urgency of engaging portfolio companies when it came to the rapidly evolving regulatory landscape. 

“This is a real business imperative,” she said.

“Companies lagging behind will lose business if a competitor is able to respond to [emissions disclosure] questionnaires immediately and is able to reduce its carbon emissions so that it doesn't look bad on scope three.”

Quotes have been updated in para 8.

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