Reflecting on the responsibility of asset managers and ESG this Earth Day
As the world marks another Earth Day, regulators, investors and stakeholders across the globe are looking to the asset management industry for leadership in combating the events of our time - climate change, social justice and diversity and inclusion. In a way, it is exciting that asset managers are viewed as a potential force for good. Yet, even with the vastness of assets we manage, there are constraints that we face. In the context of these important challenges and with the constraints we face, let’s use this Earth Day as an opportunity to consider what responsible asset managers can and should do to foster positive change.
What should large asset managers be doing to tackle global issues such as climate change? Let’s revisit the basic mission of asset management, the tools they have to work with and the constraints they face.
The basic mission of asset management: Deliver strong investment outcomes, as measured by risk-adjusted return and in response to future asset requirements.
The tools at the disposal of asset managers: Security selection, portfolio construction, asset allocation, qualitative and quantitative research, reporting, active ownership, public presence and business practices.
The constraints asset managers face: Fiduciary obligations, liquidity, regulations, capacity and client expectations and preferences.
In the context of these three points, consider that asset managers may, indeed, have something to contribute. We recognize four asset manager pillars in the context of incorporating environment, social and governance considerations into an investment practice.
Acknowledging the materiality of environment, social and governance considerations to security selection, portfolio construction, asset allocation and the risk-adjusted returns they foster. By improving qualitative and quantitative research, asset managers may be able to improve investment outcomes by integrating ESG. This acknowledgement will not necessarily lead to risk avoidance, but rather to considering all the appropriate risks as part of the return-seeking outcome.
Increasing transparency, both internally and externally, so that investors, associates, shareholders and regulators can see more clearly the inputs and outcomes associated with environment, social and governance issues. Can we create a clearer picture of both investment outcomes and the impact we foster along the way? Transparency is harder than it looks—we are still learning how to measure both the inputs and the outcomes in a meaningful way.
Leveraging active ownership as a mechanism for improving investment holdings, while considering the perspective of universal owners who benefit their stakeholders most by understanding the interconnectedness of micro-decisions. By using this leverage, asset managers may be able to move the dial on how corporations behave, shedding light in dark places, demonstrating that they are using the authority they have and demonstrating their values as a business. The fear is that the free-market economy encourages profits over the environment. But active ownership is part of that same system. If the asset managers are among the vocal shareholders, they may have a positive impact. Using active ownership to encourage transparency is a powerful tool for improving the workings of the market.
Offering choices in how investors express their preferences. By offering more choices, asset managers provide mechanisms for investors to vote with their dollars. Just how environment, social and governance information has influenced an investor’s portfolio needs to be carefully considered in the context of our basic mission of delivering investment outcomes. These choices should include transparency (there’s that word again) of how the offering is using inputs differently and what outcomes are reasonable to expect. And, finally, these offerings should be understood in the context of how an asset manager approaches the ownership of individual securities and the market at large.
To be clear, asset managers might foster positive change if we take these opportunities—we do have a role to play. We should neither wash our hands of our role in global events, nor assume that we are absent any options or any responsibility. We congratulate leading asset managers who have made bold statements and committed to rolling up their sleeves to do the hard work. We stand with them.
This Earth Day, let’s get our hands dirty—to make the world a better place.