Comment: Peter Uhlenbruch of ShareAction warns that internal processes around training and financial incentives will need to be radically reformed if the industry is to meet the demands of the new EU sustainable finance disclosure regulation
If you have ever found yourself browsing the glossy literature published by asset managers on responsible investment, you might be forgiven for thinking that the $90tn industry has the sustainability revolution well under control. After all, we are seeing gargantuan flows of client-directed funds into ESG or sustainability labelled products, while asset managers collectively trumpet their mantra to “pick us because ESG is in our DNA”.
Yet when one starts to lift the veil on responsible investment practices beyond the flashy reports and designed brochures, we find what largely remains is a surface-level effort. And given the mind-shattering scale of systemic crises facing the investment community, responsible investment demands far more than simply offering clients labelled products.
Regulation, too, is increasing the urgency of action. The EU sustainable finance disclosure regulation, which entered into force last week, aims to address greenwashing practices by having funds back up their sustainability claims with clear evidence.
Clearly, a 'lunch and learn' approach to training on ESG topics, or one-off certification programmes, won’t cut it
But, as any guru will tell you, real change only results from a profound journey within. So, what does this mean for asset managers?
Essentially, it means getting internal processes meaningfully aligned with sustainability objectives. More specifically, there are two key, but often overlooked, internal mechanisms when it comes to asset managers and responsible investment.
The first is training, which is a great place to start. Our research shows that the majority of asset managers lack a structured or systematic training programme for investment staff and key decision-makers when it comes to sustainability.
Clearly, a ”lunch and learn” approach to training on ESG topics, or one-off certification programmes, won’t cut it. Take climate change as an example. Developing investment staff to a point where they understand the tricky and dynamic balance of physical, transition and litigation climate risks, at both asset and portfolio levels, requires training with teeth. Such systemic issues are also progressing at break-neck speed, which require formalised and continuous training programmes to adequately capture.
Thankfully, some investors are leading by example. In our latest leading practice guide, we highlight one asset manager who partnered with an academic institution to develop a learning curriculum for investment staff and directors that bridges scientific and investment expertise.
That part about training directors is also critical. We often find asset managers struggling with limited resources to roll-out ESG integration on a firm-wide level. Directors in tune with systemic ESG risks can unlock “buy in” from the top and unleash more resources to invest in the internal infrastructure needed to push ESG integration beyond the skin barrier and a little closer to the DNA.
The second key area is financial incentives. You would think the “ESG in our DNA” mantra would automatically imply ESG integration into remuneration structures, but this is not the case. Right now, finding detailed disclosure by asset managers on how financial incentives are aligned with sustainability objectives is like trying to find a needle in a haystack. Yet this is a demand that investors are all too eager to put to their investee companies. Asset managers may not be taken seriously on this request until they get their own compensation packages into sustainable shape. Again, we know it's possible. We also featured a large Canadian asset manager that either rewards or penalises annual bonuses based on carbon-reduction performance across its investments. Sadly, such integration and disclosure remain the exception, not the norm.
A stronger standard for responsible investment on training and financial incentives is clearly lacking and sorely needed
We know that getting these internal processes right can yield tremendous results. Our 2020 global ranking of asset managers on responsible investment surfaced a correlation between the best overall performers and those with advanced ESG training programmes. This means that if we want to push the industry as a whole forward, training is a great building block to focus on.
What we don’t know is how hard asset owners and investment consultants are pushing their asset managers on these keystone questions. Perhaps not very, if at all, which would explain the current state of affairs.
But what a great opportunity for these key stakeholders in the investment value chain to step up and start flexing their muscle. Asset owners and their consultants are in a privileged position to set expectations, and consequences, for their asset managers on these topics. And now we have clear examples, set by the asset management industry itself, to prove it is already possible.
A stronger standard for responsible investment on training and financial incentives is clearly lacking and sorely needed. But all the elements are already available and only requires stakeholders to prompt asset managers to trigger a deeper search and will to action, from within.
Peter Uhlenbruch is head of investor standards at ShareAction