We employ asset managers for a reason
The reason we employ asset managers is that they are better at investing our money than we are ourselves. They can do the job more time and cost effeciently , execute our wishes more accurately and provide better financial outcomes in terms of income and capital returns than we can ourselves.
Nevertheless, in employing someone to invest for us, we are moving one stop away from the coalface and have to accept someone else’s word for it.
When the brief is just about maximising returns then the conversation with the asset manager is quite easy, finding out if the strategies worked is simple enough, there are metrics in place to benchmark performance and means to compare the impact on the pure return of the local costs and charges incurred by the manager.
But when the brief is to invest according to values, then matters get a lot more personal. The rating given by one analyst to Tesla might be based on the way the company treats people, another analyst might weight Tesla according to the impact its products have on the environment
The electric carmaker is rated in the bottom 10 per cent of all companies by one rating agency (JUST Capital) but receives an “A” grade from another (MSCI). It is easy to see how investors looking at this might be left scratching their heads.
We employ asset managers to make sense of the noise.
While some asset managers make sense of the noise – most don’t
It is clear , reading Share Action’s report that not all asset managers are the same and that the best, which include UK managers LGIM and Aviva are followed by a long and toxic tail.
When it comes to picking who should manage our assets , we need an independent assessment because in the race to virtue – not everyone obeys the rules!
The race to virtue..
Annoyingly, we start out with a broad concept like “responsible investment” or “FTSE for good” , narrow down to Environmental, Social and Governance and soon find ourselves involved in heated debate about “green washing”.
There is sufficient “fake news” about ESG, that intermediaries are now employed to separate “noise” from “action” and we start judging ESG managers by their capacity not to be gulled by the management of the companies they invest in.
Everyone now knows that if you can convince investors that you have embedded ESG into your working practice you are more investable than your rival who hasn’t and we find ourselves caught up in the corporate “race to virtue”.
Leads to more regulation?
So within a few years of our first hearing about ESG, we can read Steven Maijoor, chair of the European Securities and Markets Authority (ESMA) in the FT
Companies that certify information on (ESG) criteria need “strong registration and supervision to prevent greenwashing. Personally, I believe that, where ESG ratings are used for investment purposes, [accrediting] rating agencies should be regulated and supervised appropriately by public sector authorities.
The FT rightly points out that the standardisation of analysis does not always lead to good analysis (witness the analysis of CDIs that allowed the housing finance crisis in 2008 to blow up the financial system).
It is possible to imagine an infinite regress of audit , marking each analyst , regulator and regulatory supervisor. But what happens here is a thickening of the layer of intermediation between the investor and the owned asset.
Value driven ESG needs bottom-up engagement.
To counter this thickening of intermediation we need some anti-coagulant. We actually need the people who own the shares to vote the shares, disrupt organisations issuing dirty green bonds and generally be heard. Whether this is through the public disruption of extinction rebellion or the activities of voting agencies, the voices of individual investors can be heard.
And if software can be developed that allows people to see the investments chosen by others and make their own mind up on the ESG of those investments, we can get a different kind of rating, one based on individual conviction which – collectively – can influence from the bottom up.
So the investors at Pension Bee started asking Legal & General questions about why there were fossil fuel holdings in its Future World Fund into which they were investing. Legal & General became answerable to Pension Bee as a proxy for these savers and I am quite sure that L&G now factor in the views of this group of investors – organised as they are by a pension manager which takes the governance of the funds on its platform seriously.
As organisation like PIRC, Minerva and Share Action have shown, a relatively few activist shareholders can influence corporate behaviour as much as ESMA.
And technology means companies find it harder to avoid scrutiny
Technology is driving greater transparency, The FT cite the impact of satellites tracking gas flares in the US to establish under-counting of wasted emissions by US oil companies. Data analytics can highlight inconsistencies in financial reporting and social media can build up a picture of actual behaviour based on first hand accounts.
It is increasingly hard for investable companies to get people to take their word for it. Which is what gives us hope that value-based investing is worth it.
Left to its own devices, the asset management industry could quickly absorb ESG into its business as usual with all the regulatory thickening necessary to meet Steven Mijoor’s predilections. But that would not a responsible investment industry, responding to the values of investors.
MMMM could organise this bottom up revolution
For investor’s to impose their values on the investment process, they will have to become more active, just as the investors in Future World, organised by Pension Bee, became more active. We need “share action” from individual investors through ESG’s Trustees, the investment committees of platforms, employer governance committees and ultimately we need this driven by individual investors. We need more apps like Tickr , software like Tumelo and more people using them.
We need Richard Curtis’ “Make My Money Matter‘ campaign to kick in and for young partnering companies to make their way forward.
These are the partners to Make My Money Matter and I hope to see this list of excellence grow.
I look forward to reporting more on developments in this space!