How does an organization attract and engage its various stakeholders? An inspirational purpose described in a mission statement may be one of the most effective methods. Author Simon Sinek has presented a simpler idea in his book Why start with. Sinek believes that what makes the difference between great leaders, companies and mobility is that they make it easier for people to understand why they are behind them.
An organization can enable sustainable sales and long-term growth when it gains trust from its customers and other internal and external partners. Like any other business, asset managers need to explain why. Clients today want to produce a real positive impact of their investment as well as a return. Asset managers need to determine how they plan to do this.
At Sustainability we believe this is not only possible but essential.
The big story of asset management in recent years is the rise of sustainability- and environmental, social and governance (ESG) – focus funds. Behind the substantial flow in these products, existing funds have been rebranded, even greenwashed, to create an ESG look.
But investors and clients are smart and developing the ability to tell whether an investment strategy is actually ESG. Regulators are also starting to pay attention, especially in Europe, to monitor whether green-sounding funds are consistent with their branding.
This is why asset managers need to be careful with ESG ambitions and define why from the start. For this they need to determine what is meant by ESG. In this context, the ESG lens is not only a risk-management tool, but also a means of achieving beneficial, non-financial results.
This is an important difference. We believe that every asset manager should be screened for ESG risk. That positive, bottom line objective, though, is much harder to realize. It requires a commitment at the very top that cascades through an organization. It starts with a broad definition of why.
Clients are not stupid and they are able to distinguish authentic ESG asset managers from pretenders. A key test is to start with a C-suit and board. Are they walking and talking? Do board members have sustainable skills? Is there an ESG-related KPI?
If a resource manager’s marketing messages are not backed up by concrete actions linked to measurable ESG success, clients will separate the promotion from the actual purpose, the substance form.
Quick Toolbox: Is a Fund ESG Authentic?
|Is the fact sheet or other public report tracking the purpose of the ESG?|
|What percentage of the firm’s total assets under management (AUM) is ESG assets?|
|Is the transparency of the mission compatible with the product?|
|What is the ESG track record in recent years?|
|Does the ESG fit in with the organizational culture?|
Wealth managers have to work differently than in the past. They have to manage the relationship And Additional stakeholders. Ten years ago, when the ESG was not so central to investment, the dialogue was still critical. But the number of partners has increased significantly. Acquiring sales from clients, regulators and non-governmental organizations (NGOs) among other market participants is essential and requires new skills and competencies.
Goals It is always easier to set goals that we can achieve on our own than to build a minimum and gain acceptance from others. Leadership is needed to transform ideals into actionable goals.
To make a significant impact on corporate and policymakers, asset managers need to collaborate with other industry players or NGOs. These include Climate Action 100+, Net Zero Asset Owners Alliance and Climate Bond Initiative.
But cooperation takes more than a signature. Asset managers need to go beyond marketing announcements. In order to involve and influence corporates, they need to make decisions and live up to their objectives. It can be difficult. There are many areas of concern – biodiversity, gender diversity, net zero, round economy, etc. Asset managers need to identify their priorities.
You also need to know what they are talking about. They need to demonstrate proficiency in the subject in question. For example, Climate Action 100+ is an investor-led movement that works to ensure that major global greenhouse gas-emission companies take action to combat climate change. This is a specific goal. But what are the specificities of the sectors in question? For example, cement, steel, chemicals? Asset managers need to have both industry-specific technical and financial knowledge to help drive these industries towards achievable net-zero commitment.
And engagement requires constant effort, resources and dedication. To be credible, an asset manager must exceed the subscription fee. ESG Portfolio Management, a specialized boutique asset manager, provides a great example of how successful engagement works. The company works with Kellogg’s to reduce plastic waste and find more sustainable alternatives. They used the UN PRI Collaboration Platform to invite other asset managers to support the initiative. And they asked experts from the Ellen MacArthur Foundation and As You See, a nonprofit organization, to help them.
Use data and regulation appropriately
Data is very important for this endeavor, but its effective use requires three main steps: data sourcing, data integration and data disclosure.
And there’s a caveat: the data is a tool for measuring whether the asset manager’s ESG ambitions are being achieved. The amount of information is not as important as the quality. Why is data connected to the definition of an asset manager in the first place? Does the data allow monitoring of progress towards ESG objectives?
The answer to this question may not be clear. The data is not perfect and ESG is a broad concept that lacks a concrete matrix. Applicable gauges may be subject to qualitative or cultural influences that hinder widespread application.
The EU is trying to codify parts of the ESG world by emphasizing climate change adaptation and mitigation. But given some qualitative nature of these objectives, we do not believe that ESG is fully measurable. Regulatory oversight of various ESG funds is not a panacea for investors or asset managers. The strategy does not prove true that a fund under the EU’s Sustainable Finance Disclosure Regulation (SFDR) achieves Article 8 or Article 9 status. Asset managers can use them to optimize their strategy. But again, smart investors will see through such efforts.
ESG itself is not a destination but a journey towards creating an advanced planet. Asset managers should ask and answer why each stage and is not influenced by trendy or imitation products.
ESG Credibility and Integrity Fund managers need to rethink their objectives as both individuals and organizations. Adapting and asking why asset managers help them explore how their investments can have a real and positive impact on society.
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All posts are the author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed must not reflect the views of the CFA Institute or the author’s employer.
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