Banking

Will Goodhart: Investment management is facing a critical decade

The above, from August’s IPCC report, did not make for good bedtime reading. Many of us knew most of this already, but for those that have not been paying attention to this year’s devastating German floods, North American fires and Madagascan drought-induced famine, it must have helped the penny drop.

Climate change is impacting everything and its influence on the investment sector is now – like climate change – undeniable.

Government policy and social change are driving clients to demand we integrate climate and broader sustainability considerations into investment processes and practices.

Institutional investors are limiting their searches to managers that are signatories to the PRI as a minimum and may increasingly expect alignment with commitments such as the Net Zero Asset Managers Initiative. 

Retail investors are also catching on as they become aware of the comparative performance of sustainable investments.

A recent CFA Institute publication reported the percentage of UK retail investors with an interest in ESG rose from 51% in 2018 to 77% two years later.

The fact that high-net-worth investors were more than twice as likely than the average investor to already use ESG strategies makes this an even more compelling argument for investment managers to take these trends seriously.

Morningstar reports there were 111 new sustainable fund launches in Europe in the first quarter of 2021, the sixth quarter in a row in which there have been more than 100 new sustainable fund launches, raising a record €120bn.

The investment business has always been good at following the money, but this time it is a bit more challenging. 

The money is moving because its owners want to address the sustainability challenges and because they believe that sustainable investments will also generate a higher long-term return because of the way that consumption is evolving across economies. 

It is not too tricky to share investment return data with clients, what is harder is for investment managers to evidence the real economic change they are making in terms of driving the necessary transition to net zero. 

Impact reporting will become an increasingly important skill and activity if we are going to be able to show how the investment world is playing its part in the transition.

Paris-aligned investing is hard work. It requires data, skills, time, organisational commitment. The task is made even harder when some firms put ESG or climate branding on their product, without the capacity or commitment to deliver on that promise. 

The civil society and media groups that are reviewing portfolios and challenging them are performing an important role in holding the investment sector to account for its commitments.

Their work is vital because the investment business needs to maintain high professional standards in this field more than any other. 

Addressing the climate crisis and other sustainability considerations is going to require finance. 

Private capital will have an important role to play and should be in a position to earn attractive returns, but if clients doubt our willingness or ability to deliver on our sustainable investment promises we will lose the chance to support the transition and fail our clients. 

The CFA ecosystem’s role in this process is limited but powerful. At the heart of the global investment profession we can help build human capital faster by sharing cutting edge skills and knowledge across the sector.

The Certificate in ESG Investing and our forthcoming Certificate in Climate and Investing have been developed by investment professionals for investment professionals, helping to develop a common language and set of practices to support the profession. 

We also bring investment professionals together to share ideas to help craft standards that will help investment firms explain more clearly their purpose.

I recently interviewed Edward Mason, director of engagement and impact reporting at generation investment management and a member of Net Zero Asset Managers Initiative to discuss some of these issues. 

He summed up the challenge and the opportunity as: “This is the critical decade of our careers in investment management…we can set up all kinds of virtuous circles if asset managers are giving the same messages to companies and if companies, investors and governments are committing to net zero… Companies that set science-based targets do reduce their emissions. It can be done, and the real prize is real world change”. 

That is a prize which we all need to work towards.

Will Goodhart is chief executive at CFA UK

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