Responsible Investment: The unstoppable force?
02 Sep 2019
There’s an old philosophical question that ponders what happens when an unstoppable force meets an immovable object.
The exponential growth in responsible investment considerations that is expanding throughout the investment industry in many ways represents the unstoppable force. There are underlying regulatory drivers for the change in attitude, but the continued focus on issues such as climate change certainly suggest that there is an ongoing momentum.
The practices of investment managers, particularly in respect of pooled funds, are often regarded as the immovable object. Indeed, one of the more common barriers to trustees taking action on RI issues that we encounter is the claim that, “we can’t do anything because we’re invested in pooled funds". But should this really be the case?
Investors need to accept that there is always something that can be done, even without incurring the costs of changing manager. One of the first things on the list of things for trustees to do should be to get under the skin of their investment managers, understand what they are doing, question them on their actions, challenge them to explain their decisions and require them to improve their reporting. It may not be obvious to many, but challenging managers changes behaviours.
This came to light recently during a routine meeting with an investment manager who highlighted the significant increase in ESG questionnaires they had seen over recent times. To give some sense of scale, from receiving perhaps 2 or 3 enquiries each year, they had received over 50 such questionnaires to complete over the last 12 months, our own among these.
Importantly, not only had the volume of enquiries increased, but their view was that the quality, in terms of the depth of enquiry had also increased. This is to be expected as investors better understand responsible investment issues and start to explore practices in greater detail, looking for measurable evidence rather than anecdote both in due diligence and ongoing reporting.
Of course, a manager can employ people to respond to questionnaires: it’s a part of the business. However, it’s much harder for a manager to hide behind superficial responses to client and consultant enquiries without ultimately being found out. The consequence must therefore be that, by continuing to ask questions of investment managers and challenging them on their practices, so investors can drive behavioural changes in their managers. The risk of failing to act is ultimately the loss of business.
So what happens when the unstoppable force meets the immovable object? If investors don’t maintain their pressure, there’s a risk that the unstoppable force of responsible investment may stop. But whilst it may take time, there’s a pretty good chance that the immovable object of investment management practices may move.