ESG is the subject du jour in the investment world. But is it just a fad, or a lasting, game-changing phenomena that could potentially transform the investment industry? David Masters, Partner and Director at Lansons explores…..
It’s certainly gathering momentum with investors. Very recently JPMorgan Asset Management reported that their research showed that interest in ESG investing was growing sharply in the under 35s, with 41% saying that they had recently become more interested in it and were looking into it.
The asset management industry is certainly striving to respond to growing demand across the spectrum of investors, large and small. At a recent panel event hosted at Lansons with our partners SDL and LuxFlag, Sachin Vankalas, Director, Operations and Sustainability at LuxFlag, made the point that today “all mainstream asset managers, not just the ESG specialists, are talking more and more about ESG.” He followed that up by saying that “a large proportion of so-called ESG is made up of exclusions”, meaning that the prevalent approach by managers is to avoid investing in companies or securities that don’t meet their ESG criteria.
But is that what investors want? To invest only in companies that tick the ESG box rather than try to improve those that don’t by engaging with the management? The answer is clearly that some do, but other investors are keener on engagement and improving companies. A point reinforced by one of our other speakers, Archie Beeching, now of Muzinich & Co, and previously of the UN-backed PRI (Principles for Responsible Investment), when describing the different types of ESG strategies that his company offers.
One of the greatest challenges that ESG faces in becoming a mainstream investment practice is not just this lack of standardisation, but the fact that no two investors share the same views. Sital Cheema, founder of Jaanu Consulting, another of our panellists, said “by listening to our clients we can try to create innovative products that meet their beliefs.”
As Sital made the further point, this is easier to achieve at the institutional level, where large asset owners and asset managers can co-create investment strategies around a specific philosophy or religious beliefs. Its much harder to do this at the private investor level, not just because private investors bring smaller pots of money which create challenges of economics for investment companies, unless they can find a way to group investors into certain belief systems or ‘affinities’.
In such an environment, two things are a priority. First, you need a clear proposition. What is your ESG capability? How can you meet the varying beliefs of different investors? Moreover, you need to be able demonstrate how you are meeting both their financial and non-financial needs. Although many asset managers are quite advanced in developing their ESG strategies, the communications around them remains in its infancy. But without that clarity, why would investors choose your ESG solution over a competitor? Furthermore, as ESG takes further hold, the demands investors make on asset managers will increase. So the need for a clear starting point becomes ever more onerous.
Second, you need to have the right people in place to make this work. Finding these people is challenging but not insurmountable. As Roddy Temperly, Head of HR at SDL said at our event, you need to tap into the networks of the people you have already brought in, because there you will find people with the right mindset and right skillset.
But again, he highlights the need for a clear proposition. Why would people choose you over another employer? It won’t be the lure of the City or simply about money, not with the modern generation.
The opportunity that ESG presents has the capacity to be truly transformational for the investment sector, but only if it’s approached in the right way, with the right level of commitment. A key starting point is having a clear proposition that can appeal across the investor divide.
That is a challenge we would happily help you with. Contact me on DavidM@Lansons.com to discuss this in more detail.