Written by: Daron Pearce, Head of Asset Servicing-EMEA, BNY Mellon
As we approach FundForum 2019 in Copenhagen (24-28 June), Daron Pearce reflects on one of the most consistently discussed industry topics since last year’s conference
Environmental, social and governance (ESG) dominated conversations at last year’s FundForum conference. Responsible investment had of course been a popular topic in previous years, but it was only last year that ESG became not just a central element of the official agenda but the most frequent topic of conversations in and around the conference.
More significantly, those conversations have continued throughout the past 12 months. ESG is now high on the agenda at just about every meeting I’m having with clients.
And it is not just conversations, there is now genuine and active momentum for ESG. There is a regular stream of news about institutional investors and asset managers introducing new ESG-related investment policies, regulators and industry bodies consulting on ESG standards, and the launch of ESG-enabling services and tools.
Some investors are introducing overt exclusionary screening, such as KLP, Norway’s largest pension fund, announcing last month [May] that it would exclude gambling companies and alcohol producers from its portfolio, and First State Investments announcing it will divest from tobacco producers by the end of this year. But the dominant trend is towards ESG integration – that is, investment strategies that consider ESG factors in portfolio selection and management to achieve the conventional investment aim of maximising risk-adjusted returns. This is ESG not as an option or overlay, but as an integrated part of the investment process.
ESG is not just about investment strategies, it is increasingly about how we ourselves – as an industry – match up against ESG standards.
The investment industry – and the wider financial services industry – has long struggled under a poor reputation with the wider public for ethical standards. Unfortunately, it is a reputation built on an extensive back catalogue of questionable practices, poor transparency and sometimes outright illegal activities. Legislators, regulators and the industry itself have sought – with a good degree of success in recent years – to squeeze out the bad apples and bad practices that have tarred the whole industry with the same, negative brush.
My sense is that that bar for ethical choices and behaviours is continuing to rise, driven not only by this tighter regulation and scrutiny, but by those in the investment industry demanding more of themselves and of others. It is no longer simply about following the rules and standard practices, it is also about being seen to be doing the right thing.
With FundForum in Copenhagen this year, a recent, high-profile Danish example of this serves as a good illustration. Christian Hyldadl resigned as the CEO of ATP, Denmark’s largest pension fund, to avoid reputational damage to the fund. This did not relate to anything he had done during his two years at ATP but followed revelations that linked him with index arbitrage dividend tax speculation which had taken place under his leadership of a department of Nordea Bank a decade previously. These practices were once common and legal, but the negative association made his position at a public pension fund like ATP too uncomfortable. He and ATP had to be seen to be doing the right thing; they had to be above reproach.
Doing the right thing and being seen to do the right thing is not just about business practices. Increasingly, we are seeing bad behaviour being called out in other situations, such as the men-only Presidents Club fundraising dinner and the #MeToo campaign, as well as positive campaigns by many firms promoting workplace diversity and supporting physical and mental health. The culture of our industry is changing and what may have been tolerated a few years ago is going the way of drink-driving; all but banished through a mix of regulatory enforcement and better education and communication.
Communication may have an important role to play. While there is certainly never room for complacency, now may be the right time for the investment industry to step up communicating about the good it brings to wider society. As well as the traditional economic benefits such as providing returns to investors, allocating capital and providing employment, the industry has an increasingly positive message to share about its own contribution to progressing environmental, social and governance standards.
The views expressed herein are those of the author only and may not reflect the views of BNY Mellon.