ESG adds to paperwork already swamping due diligence teams

Asset managers face 20% annual increase in due diligence questionnaires


The rise of ESG investing is set to compound the paperwork for asset management teams already struggling to keep up with due diligence requests from investors.

In 2018, due diligence questionnaire volumes increased 20% and request for proposal (RFP) volumes rose 13%, according to Cerulli research. Most fund houses expected this trend to continue with 29% respondents expecting 2019 numbers for due diligence questionnaires to come out at least 10% higher.

Clients are conducting more operational due diligence before they invest, respondents told Cerulli in a survey of international asset managers across Europe, including the UK.

ESG and regulation also driving up due diligence

But a number of UK investment managers reckoned ESG is also a culprit behind rising due diligence.

Canaccord Genuity investment director Patrick Thomas, who is also head of the ESG portfolio service, says five years ago there wouldn’t have been an ESG requirement in most due diligence processes. Now it often requires its own questionnaire, Thomas says.

Mifid II was also a factor, but not to the same degree, because of the greater granularity required, he adds.

Quilter is asking more of fund managers than it did five years with ESG being a prime example, says fund expert Nick Wood.

Their views were echoed by asset managers that Portfolio Adviser spoke with who were unable to provide specifics on the number and nature of due diligence requests they receive but said sustainability questions were on the increase.

One of the worst jobs in asset management

But most asset managers aren’t increasing staff numbers despite the rising volumes of due diligence questionnaires.

Almost all the managers that Cerulli spoke to said budget constrains had meant headcount had been stable over the past two years, according to the European asset management research associate director Fabrizio Zumbo.

Instead, fund houses are making greater use of tech, tweaking team structures and retaining their best performing employees, Zumbo says.

This is despite the fact the work can be demoralising.

One investment manager described filling in RFPs and due diligence questionnaires as one of the worst jobs in asset management. “Everyone hates doing it because they do not think anyone reads them. I think there is a lot of truth in that viewpoint,” they told Portfolio Adviser.

The Cerulli report added that teams often feel efforts are wasted unless they win the new business.

Paper questionnaires shunned by some wealth managers

But not all UK wealth managers are firing off questionnaires.

Hawksmoor Investment Management relies on manager meetings, calls and conference sessions, says senior fund analyst James Clark.

He still wasn’t surprised to hear due diligence requests were becoming more numerous and complex, suggesting intermediaries were seeking to “cover their backs” under increased regulatory pressure.

EQ Investors also prefers fund manager meetings and data research for due diligence rather than sending off questionnaires. It did send out an ESG questionnaire of 13 questions to constituents of its buy list but said this was a one-off.

Boutiques championed for better transparency

Quilter sends out questionnaires quarterly for each of the funds it’s invested in, says Wood. Overall, the standard of responses is good, but not always, he says.

“Some are thorough and answer our questions effectively; however, some consistently send incorrect data or seem to answer a different question.”

“Subsequently there is a frustration that some fund providers appear unwilling to share important data points, such as liquidity and regulatory issues for example, whereas others, particularly smaller houses, tend to be more open and transparent.”