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Do you have an affinity for ESG investing?

<img src=“\\\esg-image.jpg” alt=“Plant growing out of plant pot” title=“Affinity for ESG?”>

The asset management industry is facing a considerable intergenerational challenge. How can it best service the successor generations to the baby boomers to offset imbalances in wealth and the transfer of financial risk from governments and corporations to the individual to help those ensuing demographic groups secure their long-term financial futures?

Part of the solution will be to overcome the levels of inertia that are a natural offshoot of the considerable success that the fund management industry has experienced in serving the baby boomer generation.

In the US alone, the Investment Company Institute estimates that 50% of all mutual fund assets are owned by baby boomers. Put another way, some 15% of US corporate equity and 10% of all corporate bonds are owned by US mutual funds on baby boomers’ behalf (1).

The sheer weight of boomer money in the market does at least mean that the fund industry has a little time before the problem becomes critical. But it also makes overcoming inertia much harder, as the volume of money involved has had a direct impact on corporates’ behaviour.

One possible route to salvation comes from Environmental, Social and Governance, or ESG, investing.

Whilst it is expected to gain traction from the growth of millennial savings and investments, it also highlights how many asset managers tend to approach these issues from a “markets first” rather than “client first” approach.

In the institutional world, ESG in all its guises has primarily been driven by large scale long-term investors that have a shared belief system reflected in their investment philosophy, often (but by no means limited to) faith-based organisations. In short, they represent specific affinities, and the role of the investment manager has been to work with these groups to set up the appropriate investment framework often in a segregated mandate.  Such has been the growth in demand for ESG, that many active managers are seeking to integrate ESG across their entire product suite.

At a retail level, whilst ESG is a hot topic, inflows are often harder to source because retail investors have vastly smaller pots and divergent views. Fund managers tend to develop their own investment strategies which may tilt to a pre-existing strength (either the E, the S or the G) and take that to market. Millennials and other investors are therefore charged with needing to sift through the products out there to find the one that fits their views (2).

That seems an extremely counter-intuitive approach.

Since the asset management industry seems to fear the potential emergence of an “Amazon Asset Management” or a “Google Ventures”, perhaps we should extrapolate how those currently only theoretical businesses would approach this problem.

One can imagine that the answer would be first and foremost to understand the client need. These businesses have proximity to their users and through that can study their behaviour and also are well placed to actually ask them what they want. From that, they can derive a suite of investment products that seek to fulfil its clients ESG needs as they evolve. Effectively, they would set up a small number of groups whose ESG needs are aligned under certain affinities.

Matching this would bring the asset management industry into a more client-focused, co-creative approach, and away from a “one size fits all” mentality. Without that, it’s hard to see ESG really gaining the levels of traction that it is expected to. Many asset managers justifiably lean on the UN’s 17 sustainable development goals, but these do not align with all investors’ views.

Obviously, this partnership approach presents a few obstacles. Asset managers are not close to retail investors as a rule. However, distributors are – particularly the more digitally savvy ones. Moreover, there are plenty of affinity groups that exist in the UK that can be partnered with to help in the co-creation, and potential co-branding, of ESG frameworks that are likely to be of widespread appeal.

This collaborative approach should also create a greater sense of alignment with the end investor, and therefore a link with them that exists on emotional as well as financial sensibilities, which is also likely to help the asset manager retain assets during periods of challenging performance.

It is increasingly important that the fund industry better aligns itself with investors and partner organisations to ensure that when it is delivering solutions and positive outcomes that these do meet the ultimate beneficiaries’ actual needs and wants.

This article has been revised from the original which appeared in the Transparency TaskForce White Paper “Ideas to help improve the Future of Asset Management”

Source. Investment Company Institute Year Book 2018

  1. “Millennial Money: When ethical funds aren’t so ethical”, Kate Beoiley, Financial Times, June 13, 2018


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