‘Are we nearly there yet?’: five harmless words that no doubt struck horror into the hearts of countless parents over the course of the summer. Trying to explain to a toddler that the journey is just as important as the destination is likely to prove a fruitless exercise. However, regarding progress within the asset management industry towards a responsible investment end point, this is very much the case.
Although the fund management industry’s relationship with responsible investment (RI) can no longer be regarded as being in its infancy, to stretch our analogy to its limits, there is much to be learnt from the way in which this approach to investment is evolving.
If the final destination is an industry that has the creation of a cleaner, greener planet and a fairer, more inclusive society at its heart, then fund groups will need to navigate numerous bumps in the road along the way.
Indeed, from differing investor expectations over responsible outcomes to regulatory obligations, to reviewing internal resources and culture, to steering performance through volatile markets, the challenges facing asset managers are not insignificant.
Shifting mindsets
It is worth taking stock of how far along the asset management industry is on its journey. Earlier this year Square Mile surveyed fund groups, receiving detailed responses on their take on RI from 59 firms. This research found only 15.5% felt they had finalised their offering, although a significant 82.8% believed that their journey will be complete in the near future – likely 2025.
If we look at where asset managers are focusing their attention as part of this process, it seems that they are strengthening internal resources and capabilities to ensure their teams can embed these factors into their investment thinking over the long term.
What is perhaps more enlightening and important is how fund groups are shifting their mindset as part of their transition towards a fuller adoption of responsible investment. There is a broad acceptance that embracing RI is vital to the continued commercial success of their businesses, with nearly all groups claiming it is one of their principal strategic priorities.
Given the considerable growth in investor interest in strategies that aim to deliver a positive impact as well as a positive return, it is understandable that firms recognise the importance of competing in this space.
Nonetheless, asset managers are increasingly aware of their role as custodians of the planet as well as of savers’ money. One group stated that “being a responsible financial actor means our investment approach must support, and not undermine, the long-term sustainability of capital markets, economies and society.”
Another said that as active managers, it was beholden to them to exercise their power as shareholders “to drive companies to improve their governance, their carbon footprint and their human capital management”.
Engagement
Engagement featured as an important element of investment processes, with one fund group commenting that they “are most interested in companies that can improve their ESG score over time with better disclosure and revised practice”, and another stating that they have “a long-term horizon and prefer to engage directly with companies in all sectors”.
For many, engagement rather than exclusion is seen as an effective means of meeting obligations both to investors and the planet/society. Although more than half the groups surveyed apply some level of screening to all strategies, those using partial screens highlighted engagement as a key factor in their investment process with one group asserting that “engagement is usually a better way to act in the interest of our clients”.
And among those not applying ESG screens, it was not the case that these factors are not influential, but rather they were not formalised into policy at a firm level, with approaches varying from strategy to strategy.
Regulation
Regulation will also influence fund groups’ actions, with updates from the Financial Conduct Authority regarding SDR and fund labelling looming. While this was not actually highlighted as a leading consideration by asset managers, we expect it will necessitate an additional level of reporting and information to allow investors to establish the effect their investments are having on the planet and society.
Whether driven by regulation or by investor demand, reporting will become an increasingly important obligation in demonstrating the impact of responsible investment and in countering accusations of greenwashing.
Currently there is no universal framework for reporting, with groups taking differing approaches from Annual Stewardship Reports to Quarterly Fund Metrics. This may be necessary to demonstrate different RI intentions, however, consistent metrics will become increasingly necessary as fund selectors and investors seek to compare funds’ RI credentials on a like-for-lie basis.
Overall, the fact that fund managers are taking meaningful steps towards greater integration of RI within their businesses is significant; and while approaches may vary and progress differ from firm to firm, the broad acceptance that fund managers are part of the solution can only be beneficial for the planet and the people it sustains.
