How do we balance our role as stewards of our clients’ money with our obligations as sustainable investors?

By Mitesh Sheth

Key Points

  • It is a leader’s primary responsibility to provide direction, pace, and clarity of purpose.
  • We believe we cannot deliver long-term financial returns for clients and shareholders while turning a blind eye to market uncertainty, the climate emergency and growing social inequalities. 
  • Our business model needs to be sustainable in the face of growing technology, automation and falling margins, while reducing and mitigating our most material negative environmental, social and governance (ESG) impacts.
  • We believe leadership requires the clarity of thought to understand and blend the perspectives of divergent client requirements: the analysis of a traditional portfolio manager, the knowledge of the ESG specialist, and the ability to deliver tailored solutions while seeking a profitable business model.

It is a leader’s primary responsibility to provide direction, pace, and clarity of purpose. Furthermore, a leader must address conflicting priorities, make uncomfortable decisions and be prepared to deal with the consequences. A leader is also ultimately responsible for ensuring a business can deliver value for all stakeholders. We may employ expert people in specialist teams with technical roles and responsibilities, managing various interests and stakeholders, but at the heart of it, we look to our leaders to determine the direction of travel. Never has this been more important or urgent.

Our view is that we increasingly need sustainable leaders who care about not just what our clients (usually intermediaries) are asking for, but also about delivering the best outcomes for our end beneficiaries. We cannot deliver long-term financial returns for clients and shareholders while turning a blind eye to market uncertainty, the climate emergency and growing social inequalities. 

We are at the end of a 40-year period which is probably unprecedented in human history. It has been a world characterized by stable economic growth and inflation, with all boats seemingly rising. For many investors working in the markets today, interest rates only ever went down, inflation was low and stable, and companies could get away with behaving as if the planet had infinite resources and capacity to absorb toxic waste. We were a small world on a big planet.

Regime Change: Maintaining Objectivity

The re-emergence of inflation and the necessary rise of interest rates mean we are experiencing regime change; it is likely to be messy, uncomfortable and challenging. Good leaders can maintain balance and objectivity even when surrounded by fear, chaos and uncertainty, to remind stakeholders that it will get better again and that the market is cyclical in nature, while recognizing the texture of the new era will be different.

We all know that we are coming up against potentially irreversible boundary conditions for our planet – we have limited resources and we are reaching some of those limits. While there is a divergence of views around how we respond to this, there is broad consensus that a sustainable future requires a change in the way businesses are run and the way capital is invested; it requires a new kind of leadership. In addition, when all boats are no longer rising, issues of inequality become even more prominent. This burden is disproportionately borne by the younger generations, as well as by those living in poverty, particularly in the developing world. 

As leaders we need to juggle these challenging and conflicting demands, to find pragmatic solutions for all clients. A good starting point is to remember whose money we are stewarding. It is savers and investors who are relying on our help to preserve or grow their life savings for expenses, for retirement, or to pass on to future generations.

Our investment, savings and retirement solutions must be sustainable against inflation and market volatility, while ensuring that we don’t destroy the world we are living in. Our business model needs to be sustainable in the face of growing technology, automation and falling margins, while reducing and mitigating our most material negative environmental, social and governance (ESG) impacts. In our view, our product range, solutions and investment guidelines need to be sustainable to ensure sufficient flexibility to deliver value for clients in uncertain times.

By sustainable, we mean financially, environmentally and socially sustainable.  We do not think that a superficial focus on ticking ESG or diversity, equity and inclusion (DEI) boxes will deliver better outcomes in the long run. We believe that material ESG-related risks, issues and opportunities should be part of the investment decision-making process. They need to be considered as part of the ‘mosaic’ of inputs captured during the research and analysis process for every company, country and decision. This requires analysts and portfolio managers to be equipped with the skills to assess if, how and when governments, regulators, customers and ultimately markets will factor in the value placed on negative external consequences created by companies. This is no mean feat. Many may avoid such integration, and some will fail to achieve it. We believe that a CIO must embrace this responsibility and not rely solely on separate responsible investment or ESG teams to lead the way.

As leaders we must recognize the diversity of our client base, which will range from those that care deeply about ethical issues based on their values, to those focused primarily on the environment, to those that are mindful of their overarching responsibility to grow the value of their stakeholders’ money above all else. In an industry full of noise, leadership requires the clarity of thought to understand and blend the perspectives of these divergent client requirements: the analysis of a traditional portfolio manager, the knowledge of the ESG specialist, and the ability to deliver tailored solutions while seeking a profitable business model.

Effective Collaboration

Increasingly as leaders, we need to put aside our commercial focus and collaborate with competitors. Last year, UK and global investment consulting leaders got their heads together to share research approaches and collectively agree on how they will consistently measure progress on DEI. This could be transformational in moving forward together. Achieving net-zero carbon emissions is another area where we think this approach is urgently required. This systemic issue will never be solved by a single responsible investment team or by any industry in isolation.

If we employ and train the same people in the same way we always have, while organizing them in the same teams and roles we always did, we risk setting them up for failure as they address radically different and more complex problems from those which they have faced before. I am grateful to be able to work with sustainable leaders who are not afraid to make bold decisions and stand apart from the crowd, and who challenge our diverse talent to work differently, so that we may seek more innovative solutions to deal with the uncertain and existential threats our entire industry faces.

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