05 March 2020John Hall

Asset ManagementAsset ManagementAsset Management MOMEnvironmentalESGGreenwashinginstitutionalInvestmentsMarketingRegulation

Rising economic inequality has caused public trust to decline and that, combined with the huge amount of company data in the public domain, has left companies vulnerable to reputation issues.

The state of play:

  • Rising economic inequality has caused public trust to decline and that, combined with the huge amount of company data in the public domain, has left companies vulnerable to reputation issues.
  • As we enter the third decade of the 21st Century, a company’s value can no longer be based on just its short-term profitability. To ensure a company maintains that public trust, it needs an effective accountability framework and stewardship is a key plank within this framework.
  • Greater transparency over investor expectations, how investors engage with investee companies and their areas of greatest priority help to drive stronger governance and more effective corporate reporting.
  • Investors no longer just base their decisions on numbers, they want to see a clearer focus on social impact, environment, human capital, governance, trust and reputation.
  • In this roundtable, EY shared some of the findings from their recent research amongst asset managers and owners to see how they are embracing the responsibility of stewardship.

Long-term value creation:

Two years ago, EY embarked on a research project across 30 businesses from around the globe boasting US$30 trillion in assets under management. The initiative sought to answer a series of questions including how to define the term “long-term value creation” and which ESG metrics matter the most in the current climate.

The World Economic Forum (WEF) International Business Council Metrics:

  • Ultimately, the aim for EY was how they could use this information to help companies better articulate their long-term equity narrative. Published last year, the report forms one of the four pillars for the WEF International Business Council Metrics. It has also been used by the FCA in the launch of their new stewardship code, as well as published by Harvard.
  • In terms of ESG, EY worked with the Financial Planning Council to understand what the new principles and provisions were which then formed the baseline of their research.

Key observations are as follows:

  • The study found that while governance is strong in the UK, EY found that, overall, the industry is operating across a “very shallow pool” when it comes to both the S and G across the value chain.
  • Having conducted one-to-one interviews with each of the asset management houses on both the stewardship side and fund managers, EY found that not all houses are integrated leading to a gap between the buy and sell side.
  • Originally, the team used a three-point scale system of red, amber and green but found that the model was overwhelmed by too much red. Therefore, they revised the system to a five-point scale to add more depth and nuance.
  • Once the results were published, the team received a high number of calls from various asset managers they had interviewed asking why they had ranked so poorly in certain areas which, again, points to a discrepancy between a tick box approach to ESG and marrying these to tangible actions.
  • The theme of trust and reputation was also noted. EY stated that, while many of the participants openly agreed that the industry is facing a reputational crisis, there was a distinct lack of communication between asset owners, managers and their investee companies.
  • While it was agreed that people are the most strategic asset for all organisations, it was pointed out that very few asset managers and owners disclose on corporate culture. EY suggested that we may see an increased focus on this over the next year beyond the current methods of assessments e.g. employee engagement surveys.
  • The balance between what a company keeps private vs. public disclosure was debated and the extent to which being more vocal about your own ESG practices can help shape competitive differentiation and explain value for money.
  • Practices of engagement, specifically whether it is better to divest completely or engage and influence from the inside or take collective action to directly or indirectly bring about change, and the problems this could pose for companies engaging with the emerging markets e.g. small-to-mid caps in Nigeria.
  • Confusion over whether a company could adhere to “ESG” and “impact” investing if it were also operating in oil and gas companies and whether MSCI analytics and models are fit for purpose.
  • Friction between ESG and different areas of the SDGse. the use of polluting industries to help power economic development in emerging countries and differing standards of what it means to be environmentally friendly.