When adverts for responsible investment products have infiltrated even your Instagram feed, you know it’s an investment trend that’s here to stay. And if there’s anyone who understands responsible investment, it’s Will Oulton, the man responsible for implementing it across First State’s global business. Variously an academic, a strategist, a business developer and chairman of Eurosif, Oulton is one of the leading voices in the push to embed responsible investment across the industry. In a recent chat with Copylab, Oulton sat down to discuss making meaningful change, the role of asset managers and what Sir David Attenborough can teach us about plastic.
Q: A few years back, responsible investment felt like a niche area. I remember one sales consultant referring to this type of investment as “funds for hippies”. Now it feels like people have thoroughly bought into the benefits of RI. How has your role changed/evolved over time?
A: In recent years, sustainability and notions of what constitutes positive sustainable products, services and activities and corporate behaviours have become of increasing interest to the public. It’s now an important topic of public debate. As the years have progressed, the issues have become more complex, and the attendant questions have become more challenging. Consequently, my role has become more exciting – as well as demanding. Responsible investment is certainly one of the industry’s growth areas.
Q: Can you talk me through the evolving complexity of ESG/RI issues that you’ve observed?
A: Since the 1940s, economic data has taken precedence over other data. Profit margins and short-term stock prices often drive corporate strategies, and national policies are dominated by GDP growth forecasts. But as we know, profit margins and GDP don’t tell decision-makers anything about the health of a workforce, the environment or a nation. These measures provide few clues to our dependencies on environmental and human capital, as well as emerging trends and opportunities.
It’s these factors that sustainable investment places a great deal of emphasis on. They aim not only to identify those companies that are adapting to change, but those who are best placed to profit from it in the long term. In response, many companies are spending considerable resources on promoting their own sustainability credentials. An example of this is Marks & Spencer’s Plan A programme, so called because there is no ‘plan B’ for the planet. Sustainability is becoming big business and is increasingly being identified as a driver of long-term investment performance.
For companies, there are clear correlations between sustainable practices and the bottom line. According to recent academic data:
- 80% of studies show that the stock-price performance of companies is positively influenced by good sustainability practices
- 88% showed a positive correlation between sustainability and operational performance
- 90% find a relationship that points to superior sustainability practices reducing a firm’s cost of capital
- After reporting environmentally positive events, stocks show an average outperformance of 0.84%. Conversely, after negative events, stocks underperform by -0.65%.
Q: Back in 2015, the United Nations launched its sustainable development goals – with the ultimate aim of “end(ing) poverty, protect the planet and ensure prosperity for all”. Do you think the asset management industry has a part to play in meeting these goals?
A: Definitely. Asset managers have a dual role, really – first, in deploying capital to the companies that can deliver the goods and services that will allow the goals to be achieved. Their second influential role is being shareholders – holding companies to account for actions and behaviour that would prevent the goals being met.
Lately, we’ve seen several asset managers developing financial products with the specific purpose of investing in companies that have a clear contribution to make. This kind of development has been driven in expectation of client interest, as well as signals coming from some world-leading pension funds who, as asset owners, have a say in how they direct their investments.
Q: Who would you say is leading the field in targeting the sustainable development goals (SDGs)?
A: Dutch and Nordic market participants have been quick to explore how SDGs can drive investment opportunities. For example, in the Netherlands, the two biggest pension funds (ABP and PFZW) have set ambitious targets to invest €58 billion by 2020, in what they are calling Sustainable Development Investments, which are linked to the SDGs. They state that “as institutional investors we believe that it is essential to invest pension fund assets in these goals, and to do so at scale”.
Q: We’ve seen increasing numbers of asset managers becoming signatories to the Principles for Responsible Investment (PRI). While that’s obviously positive, it feels like there’s a subtle difference between signing up to the principles and embedding ESG across the business. Can you talk us through the steps asset managers should take to ‘live and breathe’ ESG?
A: Although the PRI provide a useful framework for those starting out down a responsible investment track, there can be no “one size fits all”. The approach to responsible investment (RI) should be unique to each investor’s philosophy, culture and investment approach. That said, there are some common components among industry leaders. These include having:
- A clear purpose and set of beliefs on RI and how ESG contributes to investment outcomes
- A robust internal governance structure with contributions and support from senior management
- A learning culture that ensures ownership of RI throughout the organisation
- A clearly defined process for integrating ESG factors into the investment process and decision-making
- A high degree of transparency and high-quality reporting, with examples and case studies.
At the end of the day, however, it boils down to a strong conviction and belief that ESG issues can affect the long-term risk/return dynamic.
Q: The rising use of alternative media has arguably fed a view that climate change is a myth (‘fake news’). Do you think the asset management industry has a part to play in combating such narratives?
A: I think that the beliefs as to the reality and potential impacts of climate change are mixed and not well understood across the financial industry. There are many reasons for this – vested interests, time horizons, limited data. There’s also a belief that climate change is a political and public-policy issue, and not a material investment one. The asset management industry is gradually coming to recognise that, as fiduciaries and stewards of their clients’ capital, they cannot simply ignore the risks that emanate from climate change. And the scientific data is largely consistent in showing that we are experiencing a period of climatic change that is unprecedented.
Q: The popularity of ESG/ethical funds shows us that investors are increasingly mindful of where their money is going. Could we reach a point where asset management companies are, themselves, scrutinised for their ESG record? When they’re required to declare things like litigation, employee relations, sexual harassment?
A: Publicly listed asset management companies are already scrutinised and rated against one other by ESG research agencies and their own shareholders. They’re assessed on their environmental and social performance, as well as their own corporate governance practices. And all asset managers, whether listed or not, are regularly assessed by pension fund advisers and investment consultants. As the interest in responsible investment has grown, the features, characteristics and behaviours of asset management companies and the key individuals within them are increasingly coming under the spotlight. This is an industry development that’s unlikely to cease.
Q: Are we approaching a point when all funds sold will, essentially, reflect ESG principles? In other words, is it likely that people will reject funds that cannot demonstrate robust adherence to ESG?
A: Unfortunately, no. We’re far from that point, although the EU’s expert panel on sustainable investment (HLEG) is recommending to the EU that they develop a policy that would result in a Europe-wide labelling system for investment products. Products would carry a set of information as to how “sustainable” they are. This is a positive development.
There’s also an important generational element to this. Millennials (those born in the ‘80s and ‘90s) are much more attuned to sustainability and social justice than any generation before. This is partly due to the emergence of social media, and the fact that sustainability has been taught in schools for some time. By 2025, it is estimated that millennials will comprise 25% of the US population.
This has several potential implications. For example:
- Businesses perceived to be unsustainable or socially controversial will find it difficult to attract and retain talent
- More investment schemes will undergo greater scrutiny of their actual investments by their clients and beneficiaries
- Social media technology will enable more peer-to-peer investment activity, putting pressure on the increased disclosure of environmental and social impacts
- Millennials will want investment advice on the same terms as they get from other businesses – digitally delivered, socially/environmentally conscious, cheap and networking-oriented.
Millennials’ values and beliefs will create a desire to understand the social and environmental impacts of their investments. This in turn will shape their investment choices. Investments with positive impacts, where the impacts and societal benefits are quantified, will appeal far more than those where such impacts are, at best, unclear. Although competitive financial returns are (and will remain) important, there’s a growing desire to align such returns with a positive impact reflecting the individual’s values.
Q: What issues are you being asked about now, that you weren’t a year ago?
A: The SDGs have become a very hot topic, and detailed questions about climate exposure are also resurfacing. These questions revolve around how our business is contributing to sustainable development, and how we (as asset managers) are managing and monitoring climate risks. We actually welcome such questions and wish we got more!
Q: What are the big ESG trends you see unfolding over the next year?
A: Climate change is very much back on the agenda. The much-anticipated EU report into developing sustainable finance is likely to have a major impact. One trend that’s certainly emerging is the social consequences of technology, in relation to addiction and cybersecurity. And of course, there’ll be a growing focus on the damaging environmental impacts of plastics – thanks to Sir David Attenborough!
Q: Is there anything I haven’t asked you that you’d like to highlight or speak about?
A: There are differing views on what the term sustainability means, and therefore no global consensus on a definition. The name sustainability is derived from the Latin sustinere (to hold; put up with; sustain). Sustain can mean “maintain”, “support” or “endure”, so we can think of this in terms of activities contributing to the health of the ecosystem, avoiding environmental degradation and resource scarcity, and promoting social equality health and cohesion. Put even more simply, “do no harm”.
If more users of financial products challenge their suppliers on the “do no harm” question, we should see faster progress to a fairer and socially connected capital markets system, one that can benefit investors, society and the environment. For me, that’s the ultimate goal!
Will Oulton is the Global Head of Responsible Investing at First State Investments, and Chair of the Board of Eurosif, which promotes and champions responsible investment across Europe.
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