When I started my career nearly 30 years ago (but who’s counting?), responsible investing did not feature in my professional aspirations. That may seem an odd admission from someone whose job title includes ‘Sustainable Investment’, but it mimics the evolution of our clients in many ways. As the seasons passed I became more reflective, as is common, and started to ask myself whether investors can still win when seeking to minimise the impact on the environment and stakeholders. Today, my answer is emphatically that you can indeed do well by doing good.
Over the years I have seen a growing desire among clients to invest in companies that are resilient and create solutions to environmental, social or governance issues, such as water sustainability, air pollution and material sourcing throughout the supply chain. And this approach makes investment sense.
When companies make decisions which respect their employees, the environment, and local communities, they’re less likely to face the kinds of fines, public backlash, and boardroom turmoil that can hurt their share prices. Companies increasingly realise that their shareholders are not their only stakeholders, so chasing short-term profits (or financial metrics) at the expense of long-term social impact will have repercussions for their competitive advantage, whether that’s to do with maintaining operating licences, the long-term sustainability of the business, or something else. Applying a company-by-company, critical approach helps distinguish businesses that ‘get it’ from those that don't.
One of the most comprehensive studies on the topic is by consulting firm McKinsey, which quantified the effects of corporate long-termism. After reviewing 615 large and mid-cap companies between 2001 and 2014, they found that companies managed with a long-term mindset - those that consistently reinvested profits in research or hiring - had 47 per cent greater revenue growth and 36 per cent greater profit growth than peers which focused on shorter-term decisions designed to boost earnings per share aggressively.
I take from this that we all need to be authentic investors, who are not only committed to investing for returns, but also to aligning broader values with our performance goals. Prospective investors will react best when they trust a manager's authenticity around ESG integration and are comfortable with the chosen approach in the diverse space of responsible and sustainable investing. That means we, as asset managers, need to provide clarity around the strategies and methods we apply.
There are encouraging signs that the asset management industry is evolving and reorienting towards a more sustainable path. The CFA Institute said it well; “making a consistent…contribution to societal wealth and well-being is not just a nice goal for the investment management profession – it is quite possibly a matter of existential importance”. However, just 11 per cent of investment leaders describe the impact of their industry as 'very positive for society'. Here lies an opportunity for progressive investment managers.
As asset managers with tremendous analytical capability and corporate access, we can make sense of a dynamic, complex and interconnected world and enable better long-term outcomes, financially and for broader stakeholders. But one of the greatest challenges is authenticity. In other words, how comfortable are we with committing to the statement that it’s possible to have conviction in responsible investing and deliver market-beating returns?
Asset managers can show their commitment towards responsible investing by revealing to investors the depth of their ESG resources and how they report and calculate ESG risks within a portfolio. This could include thematic engagement on topics such as gender diversity, whistle-blower programs, fossil fuel resilience or human capital-related issues. It’s crucial to ensure the effects of these dialogues can be demonstrated through reporting.
We also can't change the way we work unless the metrics change: benchmarks, performance measurement practices, contract terms and bonus structures are fundamental to motivations and therefore shape resulting behaviours.
There is huge potential waiting to be tapped, and the expectations of many asset owners are evolving quickly. A client summed up the challenge facing leading asset managers succinctly: “You've got all the capital – now go out and change the world”.
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