A decade of experience in responsible investment has taught us that individuals and the wider industry’s views on sustainability/ESG are constantly evolving. In response to this challenge, in April and May 2017, we commenced a project with the support of Willis Towers Watson’s Thinking Ahead Institute to establish the investment beliefs across our entire business relating to ESG integration, climate change and sustainability.
Unprecedented among global asset managers, this project in its first phase involved a business wide exercise testing the extent of individuals beliefs on issues such as the materiality of ESG factors, the extent to which they are mispriced and can therefore contribute to long-term investment performance and the wider social purpose of sustainability, ESG and stewardship in investment management.
Helpfully, we are able to assess and benchmark our own beliefs against a peer group of managers and asset owners within the Willis Towers Watson client base who have completed a similar exercise.
The survey has established where employees have the strongest (and least) conviction on a range of potential beliefs statements. We have also evaluated the coherence of beliefs in terms of the degree of consistency and uniformity i.e. the extent to which individuals in a group share beliefs.
The analysis also reveals how beliefs vary among different groups within the business; from the leadership team to individual investment and operational teams, as well as across our different regions. This rich source of information has provided the basis to build a draft set of investment beliefs for the business. This will require internal consultations and workshops to establish and then define an agreed set of statements which will integrate and align with our corporate culture. The research will also allow us to ascertain if there are any regional biases across the organisation by, for example, comparing views of our colleagues in Europe or Asia with those of our Australian and US-based staff.
When this process is complete, it will enable us to review and enhance our investment Principles and Policies and to assess how our current range of investment portfolios’ comply.
Some early raw output from this research includes data that indicates that:
80% of our investment professionals believe that considering ESG issues leads to more complete analyses and over 90% believe that stewardship can positively influence company behaviour and returns. Our senior executive committee, known as the Operating Group, showed even stronger support with over 90% support for these statements. No one in the Operating Group disagreed with the statements while there was less than 5% disagreement among investment professionals.
Most investment professionals believe that neither ESG nor long-term factors are efficiently priced by markets. Around 75% believe that investors are over sensitive to short-term factors. A similar number believe that risks and opportunities associated with ESG externalities are not being captured in market values.
There was majority belief that climate change will have a material impact now or within the next 10 years. However, beliefs on the extent of the financial impact were mixed with almost 45% believing the impacts would be moderate or negligible over the next 20 years. At the same time 40% believed that the impact would be either substantial or extreme over that period.
A more difficult question, however, related to fossil fuels, with 28% believing technological advances would overcome the risk of these resources becoming stranded, while 35% held the opposing view. This reflects the challenge of attempting to value the impact of as yet unknown and unpredictable climate volatility.
Notwithstanding these results, more than 70% of our investment professionals believe that companies will gain signficant competitive advantages from a strategic response to these issues.
The link between broader societal and environmental sustainability to stewardship and RI in this regard was also clear. With strong support for ‘sustainable investment’ to be broader than ESG and also include the sustainability of the economic and financial systems, and for asset owners to take a more assertive role in this regard.
85% support the view that asset owners should, as a part of their duties, consider both the direct and indirect ESG impacts of their investments. Our investment professionals also believe that asset owners should incorporate these factors into investment mandates and monitor investment managers accordingly.
Source: FSI/CFSGAM as at 20 June 2017.