The sustainability narrative in wealth and asset management

2021 year-to-date has continued the now multi-year trend of challenge, change and addressing uncertainty. But one theme stands out as the growing constant. Sustainability.

After many years as a gentler backbeat, the chorus around sustainability has swelled and moved centre-stage after a breakout year in 2020 which saw ESG fund inflows quadrupling versus prior year in the UK and sustainable fund assets globally hitting a record $1.7tn. Long term investor favourability to invest sustainably is finally converting into flows. This is as much a trend for private capital as it for listed markets.

Importantly, we’re seeing the value proposition around sustainable investing begin to firm up in a way which supports investors who want to invest for good, without sacrificing returns.

It’s still a long-term play, but the thesis is now underpinned by a combination of

  • global policy putting harder lines in the sand;
  • increasingly “pro” consumer behaviours, with Greta’s 2019 “we will never forgive you” still reverberating; and
  • perhaps most powerfully, the hard economics beginning to stack up. Cost parity for renewables versus fossil and nuclear, with renewables set to get much cheaper over coming years is just one telling tipping point. Another is a competitive performance track-record through COVID, albeit there is some debate as to whether some of that is more simply attributable to tech overweights. A third is the downside risk of getting ESG wrong in terms of brand and reputation hits and the associated value destruction, estimated by BAML at the end of 2019 as having wiped more than $500bn off the value of large US companies over the previous five years and surely heightened since then.

As for businesses more broadly, having a thought through position on sustainability, on an absolute basis and relative to peers, is now “table stakes” for wealth and asset managers engaging with institutional investors and, increasingly, private individuals. And that includes those running high frequency and other short term trading strategies, as well as “buy and hold” long only.

With increasing capital, comes increasing scrutiny and accountability from a range of stakeholders, including clients and gatekeepers, shareholders, regulators, employees, activists, media (mainstream, but in practice more vocally, social), industry commentators and trade associations. The stakes are high. The whole nature of what it means to be sustainable has sharpened around what companies do rather than say and whether what they do looks and feels like sustainability rather than “fake news”. There is a ready chorus of “greenwash” disapproval if there is a disconnect, just a tweet away, alongside a developing body of regulatory standards.

For wealth and asset managers, the sustainability narrative operates at two levels, albeit with some overlap.

  • No.1 Persuade me that your ESG investing across asset classes is genuine and engaged.
  • No.2 Persuade me that you are taking your place as a firm in making a net positive contribution for the better.

Embedded in both these is a classic strategic comms challenge around advocacy.

This is an easy area to make conceptual statements, vague commitments or just play back to stakeholders what they want to hear. So many corporate statements lack proof points and are really just assertions. Corporate advocacy is only powerful, or indeed meaningful, if it is authentic and draws directly on what the business actually does.

Grounding the sustainability narrative is fundamentally about creating clear lines of sight between intention and action.

Here are 5 suggestions on the approach to building an effective sustainability narrative at both levels.

  1. Be authentic – understand and stress test the underlying processes (in particular the claim that ESG is integrated across all strategies) as well as behaviours and outcomes before building the narrative. Be prepared to challenge and if necessary fix/adapt before going public and on an ongoing basis.
  2. Be data-driven, evidence-based, quantified. Always tie back to the business in a way that always looks to be quantifiable and credible. Create a central advocacy bank and encourage “deposits” into it of your most compelling examples of sustainability in action. Reach into the business to recycle strong existing material, rather than re-inventing the wheel. At the same time acknowledge the complexity likely in play here. If you are running a diverse investment management businesses, different PMs are likely to implement ESG factor consideration in different ways and with different outcomes.
  3. Create “practical transparency” for all stakeholders – for example, so the Swedish teacher whose pension fund is investing in your strategy can herself see how on your app/portal/website/LinkedIn etc. what is being done in a way that squares with the commitments her pension fund made to her.
  4. Be clear on evolving applicable industry standards, but also relative positioning – sustainability is a rapidly broadening church and there are many shades. Regulators globally continue to grapple with the existential question of what does and does not count as ESG, and, aside arguably carbon neutrality, there is no clear picture currently. Monitor the evolution of applicable standards closely, but, in the meantime, tell a clear and compelling story about what makes you different from peers and why this creates sustainable value in the hands of your stakeholders. Kick the tyres on challenger Q&A from all stakeholder angles, including public policy areas like tax and work through credible responses at a topline and a granular level, including, for example, supply chain transparency in investee companies.
  5. Be in it for the long term, across multiple channels and appetites. Do not treat as a marketing exercise, but rather as a communication of root-and-branch strategy. As part of this understand the positioning of non-ESG strategies within the business (if any) and how this sits with the wider narrative. To the point on “many shades of ESG” think through thematic additions to the product suite in a way that caters more explicitly to appetite for “stronger” ESG views and plays broadly into macro themes around e.g. energy transition, healthcare and manufacturing innovation.

By Andy Knox Strategy and Technology Consultant with Meridian West.

This is an updated version of a LinkedIn article first written by Andy in October 2019