Resolving sustainability dissonance in the Wealth and Asset Management industry
Posted by Pierre-Yves Rahari on 2 December 2020
Looking at the pipeline of products to be launched in the Wealth and Asset Management space in the months to come, it is clear that Environmental, Social, and Corporate Governance (ESG) and impact investment are themes that have been fully adopted by the industry. They will dominate the agenda of product strategy discussions for the foreseeable future.
Now that this ESG product box is ticked, it is tempting to celebrate doing the right thing from a sustainability viewpoint but it is too soon to give ourselves a collective pat on the back. The reason being is there are a number of ESG issues not relating to product development, but rather to the Wealth and Asset Management organisations themselves, which still need to be addressed. Gender Pay Gap; diversity; focus on investor outcome; transparency on fees and risks; governance models; stakeholder management are just a few. These and other issues continue to make headlines in the industry press, and despite some visible and tangible progress made in a number of areas, significant gaps remain to be bridged.
This is what we call sustainability dissonance. While the products coming to the market are increasingly and enthusiastically embracing the ESG models, the producers – as business organisations – are falling short from the generally accepted definition of a sustainable model themselves. This gap needs bridging because it calls into question the real conviction and commitment of the industry. In the long run, it will call into question the authenticity of the ESG seal that we as an industry are genuinely working hard to stamp on our products, which may harm the industry as a whole.
With that in mind, how do you go about resolving this dissonance and closing the gaps? We don’t believe that there is a magic formula to fix this issue, instead we believe that each organisation can undertake a journey towards a more ESG compliant business model. Some milestones are offered hereafter.
Understanding business sustainability
A starting point is to examine what makes a business sustainable, not only in relation to the products they bring to market, but as an organisation as a whole. On that point, a distinction can be made between “sustainable business model” – defined as a business model that turns a profit while aiming to stay afloat for a long term – and a “business model that prioritises sustainability” – defined as one that considers all together all stakeholders, environmental impacts and transparency throughout. Interestingly, the later definition, provided by Lia Colabello, is aligned with that of the U.S. Business Roundtable, whereby sustainable firms should “benefit all stakeholders i.e., customers, employees, suppliers, communities, and shareholders.” George Harding-Rolls adds that a sustainable business model must be part of a sustainable economy, defined as a thriving and competitive one, “that is delivering social progress within environmental limits.”
This is where the issues we listed earlier on come into play. An organisation committed to sustainability will examine each of these issues, for example: “Gender Pay Gap” touches on the issue of equality of treatment regardless of gender; “diversity” touches on the issue of equal opportunities regardless of race, origin, sexual orientation, gender, cognitive ability etc ; “investor outcome” touches on the commitment to offer investment products that place the investor at the centre of the design process ; “transparency” touches on the commitment to offer the highest level of transparency in fees and risks programmes; “stakeholder management” touches on the inclusion of all stakeholders in the corporate mechanisms; “governance models” capture all the issues listed here at decision making level etc.
Examine your level of conviction: Start at the top, and engage your stakeholders
From there, examine the level of internal conviction to embrace an organisational ESG model. Are you, as an organisation, genuinely ready to become sustainable? While starting at the top of the organisation i.e., in the Boardroom, this process needs to be inclusive of all stakeholders as they will be key proponents in your future model: What is your collective ESG vision, and do you have commitment from all parties to deliver on that vision? If not, what are the blocking points and how do you want to address them? Once you get that collective vision, you must embed it in the governance model of your organisation, not as an annex to agenda meetings, instead incorporated and examined at the same level as all other key corporate performance indicators.
What good looks like? And when? How do you get there?
The next stage is a very practical one: What criteria are you going to measure and examine to assess whether you have become an ESG organisation, and what is your calendar to reach these objectives? From there, you can assess where you stand today on the ESG scale you have designed, and elaborate your corporate plan of action to move towards the objectives you have established. Time, prioritization and execution are of the essence here. The idea is not to turn your organisation into a perfect ESG model overnight, instead – while being ambitious, and not compromising on the ESG standards you have set for your organisation – remain realistic and pragmatic on the speed and level of execution. Rome was not built in a day. Your focus should be on ensuring that proper governance mechanisms and implementation resources are put in place to ensure that the organisation as a whole contributes to the execution of the ESG plans. For example, do you have an ESG team in place? Is this team representative of all stakeholders of your organisation? Does this team engage on a regular basis with the governance bodies of your organisation?
Apply the same rules of engagements that you apply to the organisations you invest into
The debate is still under way as to what constitutes the most appropriate ESG indexes in the industry. Nevertheless, most investment organisations have established a mechanism to assess the ESG credentials of the organisations they invest into, and review their suitability on a regular basis. The same rules of engagement can be applied when assessing the progress of your own organisation towards your sustainability vision. For example: Do you assess on a regular basis the progress against your ESG success criteria? Do you make adjustments to your ESG implementation plans based on this assessment – for example by allocating additional attention and/or resources to a strand that seems to be lagging? Do you report extensively on progress to all stakeholders? Are the latter engaged in this assessment mechanism on an ongoing basis?
Start the process all over again, and again
From here, the process we propose hitherto goes into a loop, you have to continuously examine where you stand, and make the required adjustments to getting ESG compliant. It is a journey, where progress and success will be met by an equal numbers of setbacks, but as long as the conviction and commitment to ESG translates into development plans, your organisation will be on a good path to bridging that dissonance path. Failing that, your organisation runs the risk of being disfranchised from the very stakeholders you are trying to service i.e., the investors in your own funds. As Stephen Bird, the new chief executive of Standard Life Aberdeen puts it: “Public can smell if you are [really] ethical or not.”
 Environment, Social and Governance
 “Public can smell if you’re an ethical investor or not, Standard Life Aberdeen boss warns,” The Times, November 23rd, 2020