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sustainable returns

CAIS20 blog series

Sustainable returns for a sustainable future

Sustainable returns for a sustainable future

In our new global, digital and increasingly responsible world, how can asset managers engage effectively with investors on sustainability and how can investors distinguish from those managers that walk the walk compared to those who just talk? 

We are undergoing one of the largest transfers of wealth, with reports that millennials will inherit $68bn from their baby boomer parents by 2030 [1] at a time when the climate crisis is coming to the forefront. Even well-known international tennis players cannot escape being embroiled in the debate about financial institutions supporting fossil fuel exploration [2]. 

More than any other generation, millennials are interested in the idea that their investments will have a positive global impact when it comes to issues like sustainability and climate change.

Putting aside the ethical arguments as to whether it is the role of an investment manager to do good or to generate pure return (I believe there is a strong argument that by focusing on wealth maximization, managers can have a positive impact on society and help blue collar workers facing an impending pension crisis), sustainability is gaining more traction. 

Where there is investor demand, the industry would be fool hardy to ignore. So what do investors expect?

Policy – a firm needs to have a sustainable investing policy that is embedded in its culture. Investors also want to know that their managers run their businesses ethically with a greater focus on inclusion and diversity at a manager level. They are looking at the manager’s own internal policies just as much as the investment policy.

Talent – the manager has the people with the right credentials, notwithstanding that finding those individuals can be challenging. These individuals don’t sit in a back-office function. It is not enough to have someone in marketing “that does ESG”. These people are making investment decisions and have a seat at the table; they are fully integrated and deeply embedded in the firm’s culture. 

Investment strategy – whether this is positive or negative screening, or a fundamental ground up approach, sustainable and ESG factors are key criteria in every investment decision.

Engagement – firms need to be actively engaged with their investee companies and their investors. There should be regular dialogue and a deeper understanding of what motivates investee company management. Bespoke reporting to investors on how each investee company is working towards key performance metrics can be an area to outshine other firms.

Reporting – a firm should have robust controls in place. The compliance team needs to ensure that its responsible investing policy is appropriately adhered too.  

By addressing the five elements above, managers can distinguish themselves from their peers. Investors can separate those who “green” or “rainbow” wash (in reference to the focus on the UN development goals) from those managers who really are doing good by doing well. For those managers who excel in these five areas, there is opportunity to outperform peers.  

Sustainable investing is here to stay. Those managers who fail to adapt may find that their business models are no longer sustainable. 

by Rebecca Palmer, Director

 

[1] https://www.forbes.com/sites/jackkelly/2019/10/26/millennials-will-become-richest-generation-in-american-history-as-baby-boomers-transfer-over-their-wealth/#2a8f99336c4b

[2] https://www.theguardian.com/sport/2020/jan/12/roger-federer-responds-to-climate-change-criticism-from-greta-thunberg