Carte Blanche

“Sustainability, an asset manager’s duty? ”

11 Mai 2018 Par Thomas Seale (Luxflag)
Thomas Seale Luxflag
According to Thomas Seale, “private actors and governments are expected to behave in a socially responsible way taking into account climate change, social impact, diversity and other key targets as defined by the UN Sustainable Development Goals.” (Photo: Alfi)

Back in 1962, Nobel laureate Milton -Friedman famously argued that the only social responsibility for business is to make profits («Capitalism & Freedom», Milton Friedman, 1962). Five decades later, we have witnessed a sea change in terms of this neoclassical doctrine.

Private actors and governments are expected to behave in a socially responsible way taking into account climate change, social impact, diversity and other key targets as defined by the UN Sustainable Development Goals. This shift means that asset managers must incorporate sustainable finance into their investment approach. But who should take the lead in this effort: the asset manager or the end investor?

In March this year, the EU Commission has published an action plan on sustainable finance, based on the appointed high-level expert group’s (HLEG) final report, with a -priority action to clarify fiduciary duties regarding sustainability. As fiduciary duty has in the past often been put forward as potential reason for not integrating ESG criteria, the Commission aims to include those who are not yet accounting for sustainability and rule out all remaining uncertainty.

Asset managers follow their duty in sustainability through dedicated funds and mandates and embed sustainability in the whole investment process.

Thomas Seale, Luxflag

At the Alfi European Asset Management Conference, it became clear that environmental, social and governance criteria are already considered as financially material factors by market practitioners. ESG is becoming part of modern risk management. Asset managers who have already been active in responsible investing for many years factor in sustainability as an integral part of fiduciary duty and therefore do not see a necessity for further clarification. These pioneers follow their duty in sustainability through dedicated funds and mandates and embed sustainability in the whole investment process. They differentiate themselves through innovative processes and through the depth of their ESG policies. Their engagement with companies helps improve sustainability practices and change company behaviour through an active dialogue. 

Preserve flexibility

However, another part of the industry is concerned that regulatory intervention in ESG will result in bureaucratic “box ticking”. These actors are not in favour of mandatory requirements nor strict definitions regarding eligible types of investments. They argue that standardisation and legislative intervention might impede innovation, which remains a key requirement to grow the market further. 

Still other market players are more posi-tive towards integrating ESG aspects into their conversations with investors as long as flexibility is preserved and adaptations to the needs of their clients are not hampered. In addition, an audience poll revealed hesitancy about an increasing role of European supervisory authorities for encouraging sustainability, even though promotional efforts for sustainability are welcomed. 

The asset management industry will increasingly need to embrace sustainable finance

Thomas Seale, Luxflag

However, integrating ESG into investment processes is not a simple matter. Panelists agreed that models around ESG need constant reviewing. Moreover, many feel that ESG data as it is available today needs to be improved as external sources are often considered as not consistent or reliable enough. Therefore, internal sources are increasingly becoming a requirement in sustainability implementation. It became clear that responsible investing already stopped being niche when pension funds stepped up and current developments in the market show very positive growth signs considering that companies of tomorrow will be influenced even more by ESG factors. 

The debate about fiduciary responsibility will continue, with different sides arguing convincingly their points. However, it is safe to say that the asset management industry will increasingly need to embrace sustainable finance in order to retain its agency role in helping individuals, institutions and governments save and invest for the future.