This title of a recent article in Reuters caught our eye: “Majority of global asset managers still not investing responsibly, ShareAction says.” The first line of the article goes on to say, “Global asset managers controlling trillions of dollars are failing to invest in a way that will protect climate, biodiversity, and people, despite efforts by the industry to promote its sustainable finance credentials,” according to the corporate responsibility group ShareAction.
Why did this catch our eye? This may take you back to your high school English class when the teacher had you dissect a paragraph, sentence by sentence, phrase by phrase. But in all honesty, a couple of things about the choice of words here made us stop and think — actually, three things…no, make that four:
- Investing responsibly
- …are failing to invest
- Climate, biodiversity and people
- …promote [the asset management industry’s] sustainable finance credentials
Note that we do not fully agree with ShareAction’s point of view as described in this (very brief) article. But we do think the way Reuters’ phrased certain things is interesting, and we hope to provoke some thought by commenting this. With that said, let’s dive in…
- Investing responsibly
The headline of the article uses the wording “investing responsibly.” The difference between that and “responsible investing” may seem subtle, but “investing responsibly” is active. It reminds us that all kinds of investing – the entire spectrum, across all asset classes – can and should be viewed as something to be done responsibly. In contrast, “responsible investing” can be confused with “socially responsible investing,” (usually associated with avoiding companies that engage in certain sectors such as gambling, alcohol, or tobacco that some investors find objectionable). “Responsible investing” sounds like a specific strategy – “investing responsibly” sounds like an active mindset.
We believe that all investing should be approached responsibly by integrating sustainability factors, regardless of the asset class or strategy involved – stocks or bonds, large cap or small cap, growth or value, domestic or international. The investment world isn’t there yet, but it can get there; in fact, we believe that’s where the asset management industry is headed.
Another benefit of the term “investing responsibly” is that everyone understands it. Contrast that with “ESG investing” or even worse, “doing ESG,” which are frequently misunderstood. As we have seen in the U.S., the term “ESG investing” invites (politically-motivated) accusations that shareholders are somehow being harmed. But who is likely to oppose the idea of “investing responsibly”?
- …are failing to invest…
The Reuters article says, “Global asset managers…are failing to invest…” We like that phrasing because it places the responsibility for investing responsibly squarely on asset managers’ shoulders. That is part of their job, isn’t it?! Investors rely on their asset managers to invest responsibly, so why are many of them failing? Is it that they don’t care? Or, as we suspect, is it that many asset managers do not fully appreciate what it takes to “invest responsibly” and do not have access to the information they need to do this? Before you protest, consider the following scenario for a moment.
Imagine that asset managers could not easily access standardized, audited financial statements. In that situation, investors would have no confidence that a manager could assess a company’s financial health or determine whether the business was growing or stagnating. For example, instead of preparing audited financials under GAAP or IFRS, imagine companies had discretion over the financial statements they published and how often they released that information? Asset managers would need large teams of analysts to scour the internet and other sources to dig up whatever information they could; they would have to figure out each company’s definitions of assets, liabilities, revenues, expenses, etc., in order to compare one company to another.
This is a fairly apt description of the state of environmental, social, and governance-related disclosures in the world today. While the EU is leading the way in imposing ESG disclosure standards for companies doing business in that region, there is a great deal of work to be done in most parts of the world. No wonder asset managers are struggling to invest responsibly – unless they have the resources, know where to look, and know how to verify the information they collect, they don’t have the information they need to do a good job of investing responsibly! They may be trying, but they are wearing ankle weights and fogged-up glasses.
- …to protect climate, biodiversity and people
This part of the first sentence of the Reuters article elevates the importance of biodiversity. We think that’s critically important. Not to diminish the threat of climate change in any way, but the global news outlet DW News explains in this video why the loss of biodiversity should be feared as much as climate change. Perhaps instead of the phrase “protect biodiversity” we should say “stop the mass extinction.”
It’s accurate, and would probably grab more attention.
Another thing we like about the phrasing “protect climate, biodiversity and people” is that the three are deeply interconnected. Climate change is doing great harm to biodiversity; the loss of biodiversity threatens sources of food, clean water, and medicines for people around the world. The loss of biodiversity also worsens climate change as deforestation releases more carbon into the air. Human activities are destroying the balance between biodiversity and climate that was created naturally by evolution over millennia, and that is impacting the economic prosperity we all want for people everywhere in the world.
These interrelationships remind us of one of the best-known sketches by artist M.C. Escher, “Drawing Hands.” The sketch consists of two hands, sticking out from the cuffs of a shirtsleeve. Both hands appear to “emerge” in what looks like 3D, from the flat, two-dimensional drawings of the shirtsleeves. Both hands are holding a pencil. One hand is drawing the cuff of the sleeve that encircles the wrist of other hand, and that other hand is drawing the cuff of the sleeve of the first hand. The two hands would not exist without each other. Quite a metaphor.
- … promote [the asset management industry’s] sustainable finance credentials
This phrase raises the following question: For asset managers, is “investing responsibly” mostly about promoting the concept, or is it about actually doing it? If the emphasis is on promotion, no wonder the industry suffers from accusations of greenwashing, which is dangerous and ultimately self-defeating (check out this article from EuroNews about actions related to greenwashing, such as greenhushing, greenlighting, greencrowding, and other bad behaviors).
Of course, greenwashing can take place at two levels: (1) asset managers can exaggerate (or outright fabricate) their claims about ESG/sustainable investing, and (2) corporations can exaggerate claims about their sustainability-related activities, such as efforts to reduce CO2 emissions and wasteful packaging, improve employee engagement and management diversity, and so on. Both types can fool people in the short-run, but they are misleading, damaging, and exploitive. Those who pursue this path will eventually be exposed and will suffer the consequences, with reputational damage that could be devastating.
Asset managers who sincerely work to invest their clients’ money responsibly are honoring their clients’ wishes and earning their ongoing trust. If they have access to the information they need to invest responsibly/sustainably (see #2 above) we believe they will have advantages over their competitors who ignore sustainability factors. We think a combination of both is the best approach, because it forms a virtuous circle. Promoting the value of investing responsibly educates investors about its importance; this results in more mandates and AUM for asset managers who actually do invest responsibly and deliver results, and so on. Escher’s Drawing Hands again, but in a good way.
At OWL ESG we are committed to providing the most complete, usable, timely, and transparent ESG data to asset managers, corporations, and others who need this information. To learn more about how we can help you, contact us.