The challenge facing responsible investors
Asset managers, big and small, are increasingly acknowledging their responsibility as custodians of both wealth and welfare. A steady inflow of investment assets aligned to the UN Principles for Responsible Investing coupled with regular announcements by industry grandees expressing the need for positive impact investment has alerted the wider financial community to the growing need for investments to generate both financial and non-financial returns. Consequently, the investment community has willingly adopted the UN Sustainable Development Goals as a unifying ambition and end goal of responsible investing.
All of which may lead us to believe that the investment community is urgently pressing ahead with sophisticated, data driven strategies that seek to make good on responsible investing pledges and Sustainable Development Goal alignment. Instead of innovation and sophistication, the managers that we engage with speak of frustration and impotence, regarding the implementation of positive impact strategies. Managers are frustrated by the lack of data and metrics that allow robust positive impact integration and reporting and feel impotent as they seek to implement positive impact strategies that result in superior financial returns and increased assets under management.
We see a number of major issues stopping positive impact investing becoming embedded into the mainstream processes of investment management.
1. No actionable metrics
Existing data providers support the investing community by delivering a wide range of data relating to a company’s non-financial policies and performance. Unfortunately, these data are rarely comparable, with complex and unquantified ratings instead of actionable metrics. The result is an industry that views environment, social and governance (ESG) analysis as necessary for risk reduction (at best) and a regulatory check box exercise (at worst). Investment managers cannot select investments based on a comparable series of metrics, so they understandably rely upon established and comparable financial metrics to justify investment decisions.
2. No accountability
Investment Managers are held to account based on risk adjusted returns on investment. This metric contributes more than any other factor in asset allocation and manager reputation. Unfortunately, there is currently no equivalent metric for holistic and non-financial returns. As an investment manager who believes that they invest to maximize financial and non-financial returns, there is no way of articulating these returns in a way that evidences relative success, relative to peers. Therefore, ESG and positive investment analysis remains on the fringes of the most important key performance indicators of the manager: maximize returns and increase assets under management.
3. Limited positive impact datasets
Existing non-financial data sets focus largely on risk, controversies and governance issues. All too often they conflate policy with company performance, providing a mixed view on holistic company performance. The intentional investment manager has a very limited and incomplete dataset that can form the basis for a holistic value maximizing investment decision. In an industry noted for its complexity, very little work has been done to understand the benefit a company’s products and services has on its end customer. This critical relationship forms the basis of holistic value analysis, but is not yet available in any existing dataset. Instead managers have to make do with the blunt tools of exclusion and broad thematic investing.
In an environment of increased scrutiny on expense ratios, non-financial data is too expensive. These expensive data providers do not provide actionable or relevant datasets which could result in welfare maximizing investment decisions, whilst also increasing fees to asset owners.
At Util, we speak to a wide range of investment managers and asset owners who want to make decisions that maximize wealth and welfare, however, there is clear frustration that their investment toolkit is ill equipped to make good on this intention.