All investors should be responsible investors – but are they?
Ken Willis
Partner & Head of Responsible Investment Delivery
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The bottom line:
We think all investors should be responsible investors, but are they? We have rolled out a new responsible investment philosophy to focus on moving toward engagement and action, not just informing and agreeing.
A reasonable start, when it comes to broad economic sustainability, might be for finance and investing to stop being part of the problem. That requires a bit of introspection and a mindset shift though, as for a long time the financial sector has thought of itself as a sort of impartial conduit, shuffling capital around but not dictating things per se. Many people still think that way.
As just one example, many investors collectively channel sizeable sums through their credit portfolios in new capital every year into companies running and rolling out new coal power stations, operating in a way which is very non-aligned to long-term sustainability. Do they really need to do this? Would their portfolios be so different if they avoided or scaled down these investments?
That old version of the financial system doesn’t really pass scrutiny in 2023. Another example: hundreds of billions of dollars of capital are routinely directed on autopilot into companies via funds tracking indices. But which indices? How exactly were the components selected and weighted? These aren’t pure technocratic questions with a right answer, it matters and it’s complicated.
Inform vs change
Are we as an industry really investing responsibly? Are we making actual changes that affect the way capital flows, at least at the margins, or are we trapped in an ongoing cycle of training, policies and tick box solutions and autopilot investment decisions?
Most of our careers are probably spent answering the same sort of questions, but every so often something comes along that asks different questions and demands different answers. This is one of those moments which deserves some reflection on whether we, as investment consultants, are embracing the new questions about responsible investment or whether we are putting them in a box called “compliance”.
Agenda time is one of the most scarce and important commodities in our business. So the inevitable question arises: “do we really need time on the agenda to discuss stewardship and climate change?” How do we, or rather how should we, respond? Even the most committed consultant can end up taking the easy route, reducing agenda slots and finding ourselves producing well meaning, but unhelpful, tick box compliance docs (TCFD anyone…).
It’s still common for an invocation of “fiduciary duty” to lead to pushback against changing things to invest a little more responsibly, but you don’t tend to hear that for far more material switches of assets.
We think this can and should change, but how do we reinvigorate ourselves and start producing meaningful advice that leads to responsible actions?
We have been advising on responsible investment for years, now we are stepping up to be bold.
As advisors and as an industry, we can do more to encourage concrete action to address systemic risks posed by issues such as climate change and inequality.
Our clients own a representative slice of the whole economy, so we can’t avoid systemic risks. We need to have a systemic view. What happens in the real world impacts financial markets, and what happens in the financial sector impacts the real world.
Therefore we are sharing our responsible investment philosophy, to set out how we will be bold when we advise clients – and crucially how we will move beyond training and policies to focus on action and change.
What is it?
Our responsible investment philosophy is a clear statement of intent – so you should expect to see some changes to how we advise. We pride ourselves on providing clear recommendations and not sitting on the fence, and in doing so we know that we can be challenged on that advice. This helps our clients make better decisions. Investing responsibly should be no different.
We will clearly set out our preferred approach, rather than suggesting a range of options.
We will focus on actions, not compliance. Actions grounded in a sound understanding, professional judgement and agreement. Those responsible for pension schemes can sometimes be trapped in a mindset that says they aren’t allowed to invest differently – they can. Every investment decision will impact outcomes, actual returns, risks and have real world impacts – we will help you make good decisions.
Waiting for perfect data is not an option – we need to act now. We should not be bringing you theoretical training; we will bring examples of things you are invested in and things you could invest in – we need to make discussions real.
Engagement is key. Together, we need to ask managers searching questions – get past the spin and challenge the status quo to move toward more progressive and innovative solutions. Increasingly often, we find these do exist, it just needs energy to bring them into the conversation and adopt these new ideas as standard.
This is not just you and LCP engaging with asset managers, but us engaging with you: ensuring our papers are engaging, starting interesting discussions in meetings, prioritising and focusing on actions not words.
How will this impact your investment recommendations?
When we put forward asset classes, we will include climate solutions as part of our asset class recommendations where available.
When we put forward asset managers, we will include a range of options such as tilted, sustainable and impact.
These ideas will stack up as investment propositions in their own right, and meet your requirements in terms of risk, return, fees, liquidity and so forth.
What about climate risk and net zero?
Whilst all areas of environment, social and governance are important, climate risk has the potential to permanently destroy value. We therefore encourage our clients to align their investment strategy with net zero emissions by 2050, and to have a publicly stated ambition to deliver on that target.
Should we really make agenda time to talk RI and stewardship?
In short: yes, absolutely!
One of my colleagues recently asked, “how should we respond to the challenge of ‘but we’re aiming to buy-out in three years’ time, that’s only 12 ISC meetings, so do we really have to spend 12 hours discussing RI?’”.
In meetings, we already spend time discussing, rightly, the subject of longevity and longevity assumptions – but that doesn’t impact actual longevity. Spending time discussing how asset owners could invest differently could actually change people’s actual longevity.
So let’s commit to spending those 12 hours, which is only 0.05% of the next three years, improving outcomes and better managing systemic risk. Even a small percentage of assets can mean many millions of £s invested can have a positive impact.
Are we being bold enough? We want to be. If you aren’t seeing bold advice from us, please get in touch. My contact details are here – I am listening, and would love to engage and be challenged.
