How can Asset Managers build trust by translating their SDG Ambition into their corporate strategy?
In our first article of this sustainable finance series, we presented the four dimensions of real Environmental, Societal & Governance (ESG) players that Asset Managers need to fulfill their role as key contributors to the transition to a sustainable economy.
In this article we explore the first dimension – anchoring sustainability at the heart of corporate strategy – and identify four key enablers for the Asset Management industry. However, we do believe that these four enablers can be expanded to many other industries and companies.
A paradigm shift in the financial industry is today needed to meet the objectives of the Sustainable Development Goals (SDGs) and to cover the annual funding of $2.5 trillion by 2030. Most Asset Managers are already capitalizing on the rising “sustainability wave” by flooding the market with green investment products to respond to this new capital allocation challenge and to demonstrate their engagement towards sustainability. According to the latest figures published by the Global Sustainable Investment Alliance (GSIA), the total assets committed to sustainable and responsible investment strategies increased by 34% between 2016 and 2018 to amount to roughly $30 trillion globally. The European market alone represents nearly half (46%) of total assets committed to sustainability and demonstrates its positioning as the hub for sustainable finance. In recent research on the influence of the COVID-19 pandemic on the acceleration of ESG investing, J.P. Morgan estimated that global sustainable assets could reach around $45 trillion AUM by the end of 2020 (a 50% increase from 2018). This exponential growth reflects a growing awareness among financial institutions of the sustainability agenda and their desire to improve long-term financial returns while reducing risks.
However, institutional and retail investors are becoming overwhelmed by the dazzling array of ESG investment assets available. This proliferation of choices, combined with a lack of standardization throughout ESG investment and reporting processes, is raising investor and regulatory concerns about the real impact of these products across the ESG spectrum. he findings of our 2020 Capital Markets Market Pulse Survey seem to support this. When Belgian investors were asked for their opinion on the following statement “ESG is predominantly marketing and I have doubts about a potential positive impact on the society”, 75% of them agreed or were at least neutral.
Although legal frameworks proposed by the European Commission in its 2018 Action Plan on Sustainable Finance, and more recently in its European Green Deal bring more transparency and standardization on the market and preserve private investments flows towards the transition to a more resilient economy, there is still a long way to go for the finance industry to reach the level of transparency sought by investors.
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Asset Managers need to truly demonstrate their engagement towards sustainability in today’s purpose-driven economy.
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This can be achieved by fully aligning their ESG investing and portfolio management strategies with their corporate strategy to anchor sustainability at the heart of their organization. In the following paragraphs, we present four enablers of this transformation.
1. True leadership commitment
The rise of “stakeholder capitalism” is redefining the meaning of corporate success. Asset Management, like every other industry, will have to develop the ability to create long-term shared value for all stakeholders while managing short-term pressures from financial markets. With only one decade left to deliver on the most pressing environmental, social and economic challenges of our time, a strong commitment from leadership is needed.
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leaders fit for the future in the Asset Management industry need to practice what they preach by taking sustainability personally to embed their SDG Ambition into core business operations and management systems.
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To get started, leaders in the Asset Management industry can take inspiration from the UN Global Compact launched in January 2020 in collaboration with Accenture and SAP. Rather than bringing forward new reporting standards and metrics, this SDG Ambition framework paves the way for them to define their own sustainability goals and targets in areas with the greatest business impact on the SDGs, prior to integrating the SDGs across three critical dimensions – people, processes and technology.
The framework proposes eight steps (see graph below) across two main components – Raising Ambition and Business Integration – that leaders can use to support and implement their strategy.
The implementation of a balanced business strategy – that puts the right mix between Sustainability & Trust, Profitability and Growth – will enable leaders in the Asset Management industry to act as catalysts to pioneer system change and influence their ecosystem to step in the sustainability transition.
As capital allocators and shareholders of the largest corporates in this world, Asset Managers also have an important role to play in supporting the sustainability engagement of the companies they invest in to build a more sustainable future. In this regard, proxy voting policies allow Asset Managers to directly engage with the corporate management of investee companies and to guide their business decisions to be aligned with the sustainability values and beliefs of their clients.
2. Technology stack designed for impact, scalability & flexibility
To contribute to their company-wide sustainability ambitions, Asset Managers should be looking at a more sustainable IT function and prioritizing investments that improve the scalability, flexibility and impact of their technology stack.
Impact & scalability to accelerate sustainability transformation
In their quest for alpha generation, Asset Managers have heavily relied on financial and alternative data sources, creating the tools to generate insights out of the raw data sets. Today, this is not enough. In the advent of socially responsible investments, Asset Managers now need to prove their worth on a broader spectrum of indicators covering environmental & societal returns.
While the impact on the investment operating model and the data architecture will be covered in a separate article, it is clear that the scalability of their technology stack is essential for Asset Managers seeking to integrate ESG at the core of their strategy. This will enable them to deal with a whole host of complex, structured and unstructured data sets. In addition, Asset Managers should consider Robotics Processes Automation (RPA) and Artificial Intelligence (AI) technologies to unlock the full potential of powerful tools at their disposal and fasten their investment and proxy-voting decisions. This calls for technical innovation often outside of the core capabilities of most Asset Management companies.
New sources of innovation and growth can be found by embracing the potential of cloud-enabled solutions. As a data-heavy industry, Green IT should become a key component of Asset Manager’s overall sustainability transformation. The incremental adoption of public cloud services will enable them to keep pace with technology innovation and increase speed-to-value when integrating ESG factors into their operating model while generating cost, revenue and agility benefits.
While the scalability of the cloud allows Asset Managers to improve their investment decision making processes, its value for sustainable transition goes much further and should be considered as a key enabler in reaching the company’s SDG Ambitions. Our analysis suggests that migration to public cloud can reduce global carbon (CO2) emissions by 59 million tons per year, which equates to taking 22 million cars off the road.
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A “sustainable cloud first” approach can unlock new opportunities for a greener planet, and a greener balance sheet.
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The optimization of their infrastructure combined with more energy efficient equipment can help Asset Managers to reduce the total cost of ownership (TCO) of their IT systems and improve their business environmental footprint.
Flexibility to embrace a dynamic market environment
Despite representing a significant and growing share of global assets under management (AUM), the market for sustainable financial products is still expected to evolve. Driven by an increased understanding of the environmental & societal issues ahead of us, investors and Asset Managers will continue to co-create tailored investment mandates to target specific impacts across the ESG spectrum.
On top of the process, governance & data architecture, innovation with impact will require Asset Managers expanding their ecosystem to include partners who have long advocated for improvements across ESG issues. While such partners can be a valuable asset in the search for improved alpha and impact, they present differing levels of maturity in terms of technology. Additionally, regulators globally are at different levels of maturity in their regulatory development roadmap. In this environment, where Asset Managers will constantly need to adapt to new product requirements, collaborate with a wider ecosystem at different levels of technical sophistication and cope with an increasingly stringent set of regulatory requirements, baking flexibility into their technology stack and delivery methodology will be key to success.
3. Elevate workforce to drive business & societal value
New generations entering the workforce have different expectations of their workplace experience. They put greater emphasis on a company’s purpose and are seeking continuous learning and growth opportunities. These profound changes require Asset Managers to adopt a more human-centric approach that fosters an inclusive and supportive culture of growth and lifelong learning. This will ensure that they can attract, retain and upskill younger generations in a context where profiles with a blended financial and ESG literacy are currently in short supply. Reimagining their Workforce Strategy will enable Asset Management firms to build a workforce that is future-ready. 89% of CEOs believe that this blend of human and business strategy is a powerful combination to drive value.
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Not only is the workforce changing, but so are the technologies and the skills needed to support the evolution of the Asset Management industry.
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A 2019 study, conducted in a partnership between Accenture and the Investment Company Institute (ICI), covering the investment operations of 33 Asset Managers, shows that 65% of Asset Managers believe that data science and technology development qualifications will be the most in demand in the next five years. On top of this, talents with a blended expertise in both financial and sustainability literacy are currently in short supply.
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Based on the priorities of their business strategy, Asset Management firms should determine what skills they will need in the future, where they want to go and how they can bring those skills together by applying the 4 B's framework (Buy – to fill the gap, Build – to sustain, Borrow – to accelerate and BOT – to automate).
Given the shorter skill cycles that technological advances are bringing in the Asset Management industry and the growing need for ESG skills, we believe that building the workforce of today is the best route to achieving the full potential of tomorrow’s business strategy. Upskilling the incumbent workforce in technology and ESG principles represents a more cost-efficient solution than hiring new employees given the budget it requires to search for top talents. The talent ecosystem of Asset Managers can also be complemented in the short run with adaptive workforce through the borrow model to gain agility and accelerate their transformation by bringing new set of skills and expertise for critical roles. Finally, Asset Managers should also consider the benefits of automation for their business and their workforce through the BOT strategic model that enables a seamless integration of ESG data & analytics capabilities across all investment processes and empowers insight-driven roles by freeing up them from repetitive tasks.
4. Foster a purposeful brand
Asset Managers that bring ESG offerings to the market must ensure that they have the right set of capabilities to embed sustainability in all parts of their organization and effectively translate it into their brand. The 2020 Hirschel and Kramer Responsible Investment Brand Index (RIBI), which assessed the ability of 284 European Asset Managers (most of them being UNPRI-signatories) to embed their commitment to responsible investment into their brand identity, provides striking insights in this regard.
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of survey participants were able to effectively link their corporate purpose with their brand.
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This suggests that there are ample opportunities for Asset Managers to differentiate themselves from the competition in terms of branding and connect on a deeper level with end-investors. However, using sustainability as a differentiator is a complicated, multi-stage integration process. It involves embedding the business sustainability strategy into the brand’s purpose, engaging with stakeholders, and reporting on progress. This highlights the opportunity for laggard AM firms to start thinking about how they can build trust with their community by elevating their brand value. As customer expectations are evolving faster than businesses, brands can no longer be static. Purposeful brands must bring their promises to life, spark emotional connections and involve their ecosystem to determine where their business should go next to continuously deliver value for their trusted community.
Although branding can sometimes be perceived as an abstract concept, all brands have a marketable value, and the fastest growing ones are those that provide the most value in the eyes of their customers. Investing in your brand is thus crucial to bridge the promise you make and the experience you deliver to your customers.
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In today’s purpose-led economy, words are not enough.
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Asset Managers must walk the talk by standing for something bigger than what they sell and by translating their purpose into valuable and measurable actions for their customers through their brand. Customers expect to see tangible proof points of a brand’s blueprint, which makes brand strategy a new competitive environment for the industry.
As capital allocators and shareholders of the world’s largest corporations, Asset Managers have an important role to play in financing the annual $2.5 trillion financing gap in reaching the Sustainable Development Goals. With only one remaining decade to deliver on the most pressing environmental, social and economic challenges of our time, CEOs in the Asset Management industry must take a stand in achieving the UN 2030 Sustainable Development Agenda by re-orienting investment flows towards a low-carbon, more resource-efficient and resilient economy.
Now more than ever, the industry needs leaders fit for the future, ready to raise their SDG Ambition and truly anchor sustainability at the heart of their organization by aligning their responsible investing and portfolio management strategies with their corporate purpose to gain investors’ trust. Governing with purpose and implementing a balanced business strategy – that achieves the right mix between Sustainability & Trust, Profitability & Growth – will enable Asset Managers to pioneer system change and influence their ecosystem by empowering their people, strengthening their existing processes and tools while leveraging new technologies to scale with impact.
Finally, words are no longer enough to reach a low-carbon, more resource-efficient and resilient economy. There is increasing pressure on Asset Management firms to operate as responsible businesses and to bring their purpose to life by providing tangible proof points on the progress made in their sustainability transformation. To demonstrate their commitment to sustainability, they must walk the talk by fostering a purposeful brand and standing for something bigger than what they sell.
In our next article, we will tackle the 2nd dimension of real ESG players: gearing up for unprecedented transparency.
This article has been co-written by Seyha Nop, Jonas Van De Wygaert and Maxime Tsvirko.