Sustainability revolution pushes asset managers to think about outcomes

Elizabeth Corley, chair of the Impact Investing Institute in the UK, has no hesitation when asked to comment on the movement towards sustainability in the asset management industry.

“It’s a revolution,” she enthuses, looking immaculate in a lockdown video call from her home in the Kent countryside.

Early in her career, mainstream asset management did not consider “anything other than financial risks and returns,” recalls Ms Corley, who was chief executive of Allianz Global Investors, first for Europe and then globally, from 2005 to 2016, acting as an adviser to the global firm in various capacities until the end of 2019. Special products in what was then called the ‘responsible investing’ space were designed only to address specific client needs.

People’s attitude towards sustainable investing started changing after the 2008/2009 financial crisis. But only over the past four or five years has there been a “massive” focus on environmental, social and governance (ESG) issues, as the scientific evidence of climate change became widely accepted, says Ms Corley, who was appointed Dame Commander of the Order of the British Empire for services to the economy and financial services in 2019.

The ABCs of asset management

At first, the focus was just on risk avoidance or mitigation: the ‘A’ of the ABC framework, where A is ‘act to avoid harm’. “What has really grown in the past two to three years is the ‘B — ‘benefit stakeholders’ — with people expecting benefits to flow beyond profits.” The healthcare crisis has greatly accelerated the movement towards multi-stakeholder capitalism, where interests of employees, customers, communities and supply chains are taken into greater consideration.

The growing realisation of the consequences of climate change, the social justice movement arising out of the Black Lives Matter protests in the US and the increasing desire to understand the impact of investments have created a “perfect storm,” adds Ms Corley. Everyone from high net worth individuals through to ordinary people buying their savings accounts is “absolutely thinking about their money in a different way, and thinking about the responsibility that asset and wealth managers have to wider stakeholders.”

What is also growing is the intent to contribute to solutions — the C of investing. “People realise that despite all intentions, we are just not meeting the needs of financing the UN sustainable development goals, not even on climate. We are still so far adrift.”

Building the right culture

The scale and intent of activity in the asset management industry has never been greater as in the past 12 months, she notes. The creation of the Impact Investing Institute a year ago was timely. As an independent, non-profit organisation, it brought together two influential initiatives: the government’s taskforce for growing a culture of social impact investing in the UK, and the UK national advisory board on impact investing.

“It has been a huge opportunity, but also a big responsibility, because we were set up with a single purpose, which was to improve the flow of private capital to impact investments which could generate financial returns,” says Ms Corley. This has meant “doubling down” on initiatives, which have ranged from the creation of a training and competency framework to help advisers better understand the meaning of impact investing, to the reviewing of fiduciary duty and the production of a legal paper, explaining how fiduciary duty and impact investing are totally compatible, and debunking common myths.

“A lot of energy” last year went into a proposal to the UK government for a green sovereign bond, a green+ gilt, believed to have the potential to scale up the country’s drive to a net-zero carbon economy, while also bringing well-defined social and economic benefits, in terms of jobs, skills and regional revitalisation.

“It is absolutely vital to identify social benefits in projects that have environmental benefits,” believes Ms Corley, and even more crucial when rebooting the economy after the Covid-19 pandemic, which has exacerbated structural inequalities in our society.

Global frameworks

The development of global frameworks, which would enable comparison of ESG returns across borders and sectors in the same way global standards in traditional investing enable comparison of risk/return performance, is a key target area for the Impact Investing Institute. The focus is on gathering more comparable performance data around ESG characteristics.

Even within the environment space, where massive work has been done on carbon measurement and reduction, it is important to consider other metrics, such as water usage, pollution, biodiversity, natural resources or the circular economy.

The definition of what counts as ‘social’ becomes even more fragmented and varied, with the pandemic casting a new light on the topic and accelerating the need for global standards. Investment managers are increasingly looking at the supply chain, with working conditions of employees now firmly scrutinised. Inclusion and diversity has been prominent for years and focus is just going to increase, she says, but its definition has really shifted over the past year to include equality of opportunity. Investors are thinking more about the socio-economic background, as well as identity, gender, race or sexuality.

“Investment and wealth managers are coming up with their own approaches — their own requests for gathering information, which is a positive step, but over time we need to see the convergence of those approaches around common standards. There is still a huge amount of work to be done,” reports Ms Corley.

Driving change

Today, virtually every investment firm accepts that they need to mitigate or avoid risk. Most are realising they have got to be accountable for benefiting stakeholders, but an increasing minority are thinking about contributing to solutions. “The level of engagement to contribute to better outcome is an area that is growing and where in the next couple of years we are going to see real differentiation by asset managers,” she says. But this is expensive, it takes time and energy, and managers must engage and analyse information beyond financial data that may not be perfect.

Chief executives of asset management companies have increasingly been making sustainability pledges, under pressure to use their power to change companies’ behaviour. Yet, several large investment firms have been criticised for backing firms’ management, rather than voting for shareholder proposals around ESG issues.

“Investors view voting against management as the failure of engagement,” explains Mr Corley, adding that divesting from companies that harm the society and the environment is not the right approach, as they will find other sources of capital. Moreover, some developing economies are entirely based on carbon intensive, or environmentally challenging industries. Divesting could lead to destitution, famine and even civil war.

“All the money should be accountable for the outcomes it is generating. But we are not going to be able to eliminate carbon emissions or get a fair living wage in every jurisdiction by 2030. We need more capital flowing into innovation and research and development, to stimulate new investable projects,” she maintains. “We will not get there only with the technology we have now. To drive change, we need to engage as well as redirect capital.”

Advice for CEOs

The industry is facing huge challenges linked to greenwashing, lack of global standards and sparse ESG data. So, what recommendations would Ms Corley give to the chief executives of today’s asset management firms?

“I’ve thought a lot about this, because it is very well being a chair and having views,” she smiles.

“It all comes back to the culture of the organisation. If I was still in charge of an asset management company, I would be thinking strategically. Sustainability would not just be another investment product, it would be the core strategy — it would be about the purpose of the company.”

It is critical not only to share this approach with the executive leadership team, but also with employees because it is “so unifying to discuss these topics, and it is amazing how many people have strongly held beliefs around sustainability.”

A chief executive should articulate an action plan for achieving their strategy, over the short and long term, and should make their firm competitive, as well as improving the overall quality of the market.

“I am a great believer that companies have a responsibility for improving the industry in which they work. Individually, we also want to be better and different, to demonstrate the value we are creating for clients, employees and stakeholders. That is, for me, around outcomes, not just inputs, and it is around intentions, not just good ideas.”

Due diligence fund analysts should also be focusing on outcomes of asset management firms, rather than processes, although this represents “quite a mindset shift.”

The impact investing industry is going to be able to set a continuously raising bar through product innovation and use of technology, including its ability to process big data with artificial intelligence and natural language processing. If market practice needs to be codified, then the regulator may want to make it mandatory. “Good regulation really helps with good market practice, but if you come in too early with hard-wired regulation, it can stifle innovation, and lead to a tick-box approach.” It is much more important to have a robust framework which sets the standard, and then find a way within that framework to allow dynamic measurement and improvement, she adds.

Although sustainability permeates all human activities nowadays, the topic has not yet provided much literary inspiration for Ms Corley, who is also a successful crime fiction writer. “Sustainability does not come into my novels,” she laughs. “These are two different parts of my life, I haven’t yet created that bridge between them.”