“Change is the law of life. And anyone who only looks to the past or present will certainly miss the future.” -John F Kennedy
Even in our first days in investment management, we were rightly warned against proclaiming: “This time it’s different.” Even if market history doesn’t repeat itself, it does rhyme: the present challenges we face could also be in theirs New to an extent, but not of its kind. Inflation, supply chain problems, asset bubbles, ongoing bull markets, fluctuations between globalism and nationalism, political risks — All of this represents the rough seas that we as investors should navigate.
So it’s a unprecedented moment by which we recognize several remarkable fundamental changes that can impact individuals, society, our economy and the planet within the years to come back. As investors, we must distinguish between the temporary rough seas which might be the hallmark of stock investing and the truly rare, transformational developments that turn into a everlasting a part of our lives.
A paradigm shift
We have identified three such phenomena, three changes which might be really different this time. Taken together, they represent a paradigm shift that can transform capital markets and the best way the asset management industry approaches alpha generation. They are:
- Environmental, social and governance (ESG) influences and investing with a stakeholder mindset
- Diversity, Equity and Inclusion (DEI) as an alpha generator
- Advances in data and technology
Why now? Of course, the COVID-19 pandemic was a turning point. It has exposed the fragility of the worldwide market and our interconnected world. The pandemic has driven change and adaptation on an unprecedented scale, proving that the speed of evolution knows few limits when necessity demands it.
But why are we sure that these three developments will fit into the material of our industry and that those that don’t adapt to them might be at a definite drawback?
Because there’s one other quiet, slow force driving this paradigm shift. Unprecedented demographic shifts are amplifying these recent perspectives and behaviors. Millennials and the Generation Their influence will increase as a part of the most important redistribution of wealth in human history. An estimated $68 trillion will change hands within the United States over the following 20 years in a single “Tsunami of wealth” This will reshape financial services.
So while the present generation of investors has opened the door to those changes, the following generation is throwing it wide open.
What impact will this shift have on the asset management industry and alpha generation? Let’s take a look at each of the three components individually.
1. ESG and the rise of stakeholder capitalism
If we return in time ten years, few mainstream investors talked about ESG influences the best way we do today. Historically, ESG criteria have been dominated by exclusion-based strategies. Today, ESG criteria are being applied more widely through the usage of operational company information to each reduce risks and seek additional performance improvements. There is currently little controversy surrounding the concept ESG information is economically and potentially material. In itself, this represents a profound philosophical leap for stock market investing professionals.
Key to this paradigm shift is the increasing concentrate on stakeholder capitalism. Investors now recognize that firms have responsibilities that transcend those of their shareholders. They have to expand their focus to all their stakeholders: employees, suppliers and customers, in addition to the environment and society at large.
An organization doesn’t operate in isolation. The economic engine that sustains them have to be treated truthfully and ethically. If value is to be built over the long run, it have to be protected. While the thought of shareholder primacy has historically prevailed, asset owners have begun to acknowledge that an organization that doesn’t align with the broader interests of stakeholders may face economic headwinds. The definition of fiduciary duty is subsequently changing significantly.
How we evolve the financial system to incorporate all stakeholders and respect the finite and vulnerable ecosystem by which we operate is critical. The future winners in business and investing might be those that can direct the arc of their business from where it’s to where it must be.
Stakeholder capitalism dictates that ESG investing must evolve. True stakeholder capitalism requires that asset managers link their investment practices not only to firm-level characteristics, but additionally to changes in the actual economy. This is a frightening prospect for investors. It requires an impact-oriented mindset. This means going beyond ESG rankings and focusing more on how firms interact with their ecosystem and what impact this might need.
2. Diversity, equity and inclusion
While DEI is indeed an element of the larger world of stakeholder capitalism, we specifically mention it due to its importance to society and its positive impact on overall business performance.
The inequalities exposed by COVID-19 and increasing support for social justice movements have brought problems with diversity and inclusion to the forefront. Sensitivity to equality and fairness has grown in recent times and the demand for a more inclusive society is reaching a peak. In parallel, there’s a big and growing body of research linking diversity to improved profitability, higher worker retention and reduced investment risk.
But within the financial services sector, for instance, change occurred too slowly. Despite the popularity that diversity leads to raised performance, there stays an absence of diversity in decision-making roles.
However, the concepts of diversity and inclusion are about so far more than simply business considerations. They strengthen the material of our economy and deliver higher outcomes for people, society and the planet.
Given this paradigm shift, asset management firms must think as technology disruptors and innovators, slightly than as monolithic organizations clinging to old and outdated beliefs and practices. To higher anticipate the far-reaching impact of rapidly changing views on DEI, firms must strengthen diversity inside their ranks. This is especially true in asset management.
Capital market participants must achieve targeted results that serve society and develop lasting businesses that thrive by balancing the needs of all stakeholders. To achieve this, inclusion of historically underrepresented groups isn’t only a profit, but a necessity.
3. Technology and data
The breathtaking pace of technological innovation has permeated the economy to such an extent that almost all sectors are actually de facto technology sectors. The rise of social media and the emergence of the “digital persona” – our online identities – have modified our lives. Access to technology and technical mastery are essential aspects within the economic success of people, firms and even countries.
The data also changes. We now have access to more data – and more technology – than ever before. But the speed at which data circulates is what is actually transformative. Combine this with the now decentralized nature of information creation, and data accuracy – or information accuracy – becomes a vital consideration.
Data and technology are changing investing. The wealth management industry offers a case study: recent tools akin to natural language processing and artificial intelligence (AI) more generally may help organize the volumes of unstructured data generated every day. With the speed of reports and the rise of social media, firms can not hide. Thanks to lower barriers to entry and the lure of high license fees, recent data sources are emerging an increasing number of regularly.
Although these tools usually are not without potential pitfalls, investors who leverage cutting-edge technology and alternative data can have a bonus within the inherently competitive investing landscape. In a world where basis points matter, access to data and, most significantly, the power to search out actionable information in that data are critical.
These three changes are really different this time. They are recent enough, fast-moving enough, and unsure enough that their potential development paths are more uncertain than the well-known challenges of investing within the stock market. Those expecting a return to a now-dead version of the pre-ESG, pre-DEI, pre-AI establishment might be unprepared for what comes next. Neither will those burdened by bureaucracy: they might have the need to embrace change, but not the sensible skills.
The recent stakeholder paradigm
What these three changes and the demographic shifts which might be driving and amplifying their influence have in common is that we’ve never seen them before. But the silver lining is that big and dramatic changes, irrespective of how disruptive, force us to innovate, find recent solutions and take into consideration recent possibilities. The investment firms that can thrive amid this paradigm shift – what we call the brand new stakeholder paradigm – might be people who understand the expectations and demands of latest voters and are flexible enough to turn into the architects of their very own destiny. Those trapped by changes they don’t understand or cannot address won’t survive.
We must understand and embrace these fundamental changes. Catching up isn’t enough and can only result in poor outcomes for investors. We must prepared the ground. Succeeding in the brand new era of the stakeholder paradigm requires a unique approach and a unique kind of investment firm.
We must commit to an investment practice that recognizes the rough seas of stock market investing but embraces the evolutionary, even revolutionary, changes amid the shift to a stakeholder orientation, a more inclusive economy, and a faster, decentralized data and technology environment.
We consider the brand new stakeholder paradigm will lead to raised outcomes on ESG issues and DEI efforts, and that data and technology advances will speed up this progress and ensure accountability.
We are optimistic that investing has a vibrant future, but only truly differentiated firms will succeed.
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Photo credit: ©Getty Images/Thomas Jackson
