How can a company address and interact its various stakeholders? An inspiring goal, formulated in a mission statement, might be some of the effective methods. The creator Simon Sinek presents a good simpler concept in his book. Sinek believes that what sets great leaders, firms and movements apart is that they make it easy for people to know the why behind them.
An organization can achieve sustainable revenue and long-term growth if it gains the trust of its clients and other internal and external partners. Like some other company, asset managers must clearly articulate their “why.” Clients today want their investments to have an actual positive impact along with a return. Asset managers must define how they may achieve this.
We at SustainFinance imagine that this just isn’t only possible but in addition essential.
Define the why
The big theme in asset management in recent times has been the emergence of funds focused on sustainability and environmental, social and governance (ESG). Due to the numerous inflows into these products, existing funds have been renamed and even “greenwashed” to create an ESG look.
But investors and clients are smart and are developing the power to acknowledge whether an investment strategy is actually ESG compliant. Regulators, especially in Europe, have also began to take notice and check whether green-sounding funds live as much as their brand promise.
Therefore, asset managers with ESG ambitions should be careful and define their “why” from the outset. To do that, they need to elucidate what they mean by ESG. In this context, the ESG perspective just isn’t only a risk management tool, but a way to attain useful non-financial outcomes.
This is a critical difference. We imagine every asset manager must be mindful of ESG risks. However, this positive, non-profit goal is way harder to attain. It requires a commitment at the highest level of leadership that continues throughout the organization. That starts with defining the why more broadly.
Clients will not be naive and are increasingly able to tell apart authentic ESG asset managers from the hypocrites. An vital test is to start out with the senior management and board of directors. Are the words spoken and the actions followed? Do board members have expertise in sustainability? Are there ESG-related KPIs?
If an asset manager’s marketing messages will not be backed up by concrete actions and measurable ESG successes, clients will distinguish hype from true intent and form from substance.
Quick toolbox: Is an ESG fund authentic?
| Are ESG objectives pursued in the actual fact sheet or other public report? |
| What percentage of the corporate’s total assets under management (AUM) are ESG assets? |
| Is the mission clearly and precisely compatible with the products? |
| What has the ESG balance sheet looked like in recent times? |
| Does ESG fit the company culture? |
Asset managers must do things otherwise than previously. They need to administer relationships with additional stakeholders. Ten years ago, when ESG was not as central to investing, dialogue was key. But the variety of stakeholders has grown significantly. Gaining buy-in from clients, regulators and non-governmental organizations (NGOs), in addition to other market participants, is crucial and requires latest skills and expertise.
Achieving goals that we are able to achieve alone is at all times easier than reaching consensus and gaining the acceptance of others. Leadership is required to remodel ideals into actionable goals.
Collaborate
To have a meaningful impact on firms and policymakers, asset managers must collaborate with other industry players or NGOs. These may include: Climate Protection 100+The Alliance of Net Zero Asset Ownersand that Climate Bonds Initiative.
But collaboration takes greater than a signature. Asset managers must transcend marketing statements. To reach and influence firms, they should set their goals and concentrate on them. This might be difficult. There are so many alternative areas of concern – biodiversity, gender diversity, net zero, circular economy, etc. Asset managers must discover their priorities.
They also must know what they’re talking about. They must reveal deep expertise on the problems involved. For example, Climate Action 100+ is an investor-led movement that advocates for the key global firms that emit greenhouse gases to take steps to combat climate change. This is a concrete goal. But what are the specifics of the sectors involved? For example, cement, steel, chemicals? Asset managers must have each the industry-specific technical and financial knowledge to assist these firms achieve achievable net zero commitments.
And engagement requires sustained effort, resources and dedication. To be credible, an asset manager must transcend subscription fees. ESG Portfolio Management, a specialized boutique asset manager, is a terrific example of how successful engagement works. The company worked with the Kellogg Company to scale back their plastic waste and find more sustainable alternatives.They used the UN PRI collaboration platform to ask other asset managers to support the initiative. And they asked experts from the Ellen MacArthur Foundation and the nonprofit organization As You Sow for his or her support.
Use data and regulations appropriately
Data could be very vital to those efforts, but using it effectively requires three key steps: data acquisition, data integration, and data disclosure.
And there may be a caveat: data is a tool to measure whether the asset manager’s ESG goals are being met. The quantity of knowledge just isn’t as vital as the standard. How does the information even fit into the asset manager’s definition of “why”? Does the information allow monitoring of progress toward the ESG goal?
The answers to those questions will not be clear-cut. Data just isn’t perfect and ESG is a broad concept that lacks concrete metrics. The applicable metrics could also be qualitative or subject to cultural influences that prevent widespread adoption.
The EU is attempting to codify parts of the ESG world, with a concentrate on climate change adaptation and mitigation. However, given the qualitative nature of a few of these goals, we don’t imagine ESG is fully quantifiable. Regulatory oversight of the assorted ESG funds just isn’t a panacea for either the investor or the asset manager. Just because a fund achieves Article 8 or Article 9 status of the EU Sustainability-Related Financial Services Disclosure Regulation (SFDR) just isn’t definitive proof that the strategy is authentic. There are loopholes that asset managers can exploit to make their strategy compliant. But again, smart investors will see through such efforts.
Moving forward
ESG just isn’t a goal in itself, but a journey towards a greater planet. Asset managers must ask and answer the “why” at every stage and must not be influenced by trends or copycat products.
To make sure the credibility and authenticity of ESG issues, fund managers must rethink their goals each as individuals and as organizations. By adapting and asking “why,” asset managers can explore how their investments can have an actual and positive impact on society.
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