Why is Sustainability still so Controversial?
The concept of “Sustainability” has been prominent in financial services for some decades, gaining traction under the impetus of thematic or regulatory frameworks. From ethical funds in the 1970s, SRI in the 1990s, the boom in Clean Energy tech in the 2000s, to the latest (and farthest-reaching) manifestation: “Environmental, Social and Governance” investing or “ESG”. Surely, with so much evidence that something needs to be done to make the world a better place, this should be an easy sell - right??
Integrating ESG criteria into portfolio decision-making has however proven to be infinitesimally complex - both to do and to explain to the market - and a subject of endless debate. Opinions are deeply divided, notably in the US where it has become a high-profile political issue for public pensions [1]. As a result, ESG has become like Marmite [2] for investors.
As investment consultant Mike Sebastian has pointed out in “ESG: Complex in a Vague Sort of Way” [3], no one seems to be able to agree on the basics - the actual and realistic goals of ESG, including the motivations and rationales of different interest groups. A perception that ESG investing is solely about ‘doing good’ is woefully inadequate.
Better communication is warranted as the concept conquers new client segments and regions. In many Asian wealth management centres, sustainability has taken a back seat in the past. Asset owners rightly need to understand “what’s in it for me”? However, this does not mean that ESG, or more generally, sustainability, can’t be a vector for positive outcomes - the intentions of many sustainable investors are sincere.
In wealth management and private banking, sustainability has often taken less rigid forms such as thematic or impact investing and philanthropy, suggesting that these better reflect the real concerns of high-net-worth clients. However, they have remained secondary to the objectives of generating income or investing in new technologies.
There is evidence that this is now changing. In some markets, as public companies become increasingly subject to ESG regulation, the wealth management sector has to keep pace. Greater awareness of the degrading natural environment on the one hand, as well as societal issues of equality, fairness and good governance, are also gaining influence. Or simply, as company owners and fiduciaries, high net worth (HNW) clients are exposed due to their corporate sustainability obligations.?
Another likely catalyst is that with wealth being passed on through generations, these topics are more likely to resonate with younger investors, concerned with preserving and protecting a legacy. Sustainable investing, if nothing else, focuses on the long-term. Private banks and wealth managers are already targeting this cohort.
Suppose such investors are really saying that they want to have their values reflected in the investments they make. In that case, financial institutions such as private banks and insurers should provide robust frameworks and guidance to give them confidence in that score.
In the WWF Sustainable Banking Assessment 2022 [4], the author encourages banks to:
Engage clients thoughtfully on sustainability issues. (NB: they may appreciate the learning journey)
Record sustainability preferences when onboarding clients
Maintain responsible Investment policies: assess sustainability risks of investments made for clients or in credit decisions?
Develop skills to assess the sustainability credentials of such investments (be ready to give credible, informed advice to clients on sustainability)
Forward-thinking institutions will put effort and resources into work before regulation makes it compulsory, as is already the case in some regions. They may also turn it to their advantage - isn’t sustainability about personal choice and reflecting values, a form of hyper-personalisation, which clients increasingly demand. What opportunities does it create for clients??
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However, personalisation requires scale and technology, notably to aggregate data on each of the client’s investments, analyse it and present it back in digestible formats. Wealth managers should get to know the types and sources of data that are available to assist with sustainability assessments and their limitations, to accurately advise clients on opportunities and risks.?
According to the World Wealth Report 2023 published by Capgemini [5], “of the relationship managers surveyed, 40% said they required more data to understand ESG impact and nearly one in two needed more ESG information to engage effectively with clients."?
Many things in sustainability are hard to measure. Currently, the data relies on company reporting, which is patchy at best for smaller and unlisted companies, the latter being where the most impact gains are to be found. Technological solutions such as AI and blockchain may increasingly be used to source and validate such data, with many start-ups active in this space. We anticipate greater integration to occur between these data items and traditional market data sets as a result.
Many private clients are less interested in the confrontational or dogmatic side of investing sustainably, or to put it another way, punishing ‘bad’ companies or funds. Instead, they require transparency on whether their portfolios are correctly aligned with their values and whether they are exposed to any material, unaddressed or un-diversified risks. The degree and nature of their concerns should be calibrated as part of the personalisation of their investment solutions.?
As for wealth management organisations, under increasing pressure to transform digitally, they may also integrate sustainability into their strategic plans. This may be key to staying ahead in a competitive marketplace and being able to service the entirety of their client’s demands.
*Privé Technologies can integrate personalised sustainable overlays into its portfolio management modules through its intricate and fully configurable data layer.
For further details of Privé Technologies' award-winning solutions for asset, wealth managers and insurance companies, please visit www.privetechnologies.com and our dedicated LinkedIn page.?
Notes and Sources:
[2] A yeast extract from the United Kingdom that people tend to either love or hate - https://www.urbandictionary.com/define.php?term=marmite
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