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Citywire World of Asset Management: Engaging on sustainability

Senior asset management executives argue that firms should be prepared to engage decisively, vote their shares, redefine fiduciary duty - and be ready to use the big stick and short laggards.

Citywire World of Asset Management: Engaging on sustainability

LONDON - Sustainability quickly became an overriding theme in many of the discussion sessions that made up the Citywire World of Asset Management event. CEOs and CIOs alike agreed that evaluating ESG-related risks was now a key part of the investment process, as companies that didn’t address these risks would simply not prove to be profitable long-term holdings.

But while the tilt from exclusion to engagement has been a familiar refrain in recent years, asset management leaders such as Aviva Investors CEO Euan Munro believe investment firms really need to raise their game in this area.

In this clip he explains why exclusion is not the way forward.

An obvious area for more active and decisive engagement is voting. Many asset managers have come in for criticism in the past on their voting records and firms will have to do more to satisfy their end investors in future. 

BlackRock vice chairman Robert Fairbairn explains how his firm’s approach has changed:

In the US in particular, the concept of fiduciary duty has been seen as an obstacle to ESG integration. CEOs felt this was a roadblock that should be removed – and the way forward could involve redefining fiduciary duty. This is already starting to happen in Europe, according to Unigestion CEO Fiona Frick. 

In this clip she describes the potential evolution of fiduciary duty.

The concept of a duty to society as well as to shareholders also came to the fore when discussing post-Covid investment themes. BlackRock CIO Nigel Bolton believes company management will in future need what he calls a ‘social licence’, as he explains here:

BlueBay CIO Mark Dowding noted that compensation studies showed ESG analysts were, on average, paid a lot less than credit analysts, which he felt was wrong and needed to change.

Dowding also wanted to see much more being done to punish ESG laggards, however, and in this clip he calls for a punchier approach from asset managers.

 

These are the CEOs’ action points on sustainability:

  • Proper integration must include investment analysis, portfolio construction and risk management. ESG teams should not be separated from the rest of the investment team. Passive providers must focus on engagement, as they cannot not hold ESG stocks in their index-based products.
  • Collaboration is needed to establish a set of definitions for broad terms such as ‘sustainable’, ‘impact investing’ and ‘ESG integration’. To deliver positive societal change and improve the emissions problem, asset management groups have to collaborate more on holding companies and their boards to account.
  • Asset management is poorly understood. One of the best ways of conveying what it does is through sustainable investing activities.
  • Finance did not cause the current crisis but is part of the solution – by directing capital into areas of need. Generic conversations about ESG are not enough. Concrete examples are necessary.
  • Company boards must explain how their activities have a bearing on social and environmental issues. For example, technology companies that exploit their workforce ought to be held to account.
  • Several participants believe fiduciary duty should cover more than pure financial concerns – for example, duty to communities, broader society and social good.
  • Regulation forcing asset managers to publish a number indicating how ESG-friendly their funds are could harm investment and social good by deterring fund managers from investing in poorly scoring companies with poor ESG records but that are good investments and willing to improve.
  • Some things cannot be fixed by asset management alone and require primary legislation. For example, obliging mining extraction companies to have money held in escrow to make sure promised restoration work takes place.
  • Asset managers must be as sustainable as the companies they invest in: no chasing short-term performance or launching funds with yields set too high.

 

You can read the full transcript of the CEO discussion on sustainability here.

The transcripts of the CIO discussions which cover ESG and sustainablity can be found here and here.

 

WAM Journal

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