Are Responsible Investors able to change the financial system?

The finance industry needs to work better together to serve a community beyond shareholders alone. The responsibility lies not with one link in the investment chain, but with the sector as a whole, as each area has their own part to play in driving change. Over 20 delegates from a variety of backgrounds within the investment chain gathered to debate on their role in changing the financial system for the benefit of wider society. The group explored three topics; responsible investment products, who should take responsibility for driving change and what can be learnt from other sectors?

1. Are today’s responsible investment products across all asset classes fit for purpose in our economically and environmentally strained world? Where are the leading edge examples?

Responsible investing should be the only choice

There is acknowledgement that there are a handful of leading tools on the market, such as Legal & General’s Future World Fund and State Street Global Advisors Gender Diversity Index, however this isn’t enough to drive necessary change. In the same way that we are asking businesses to embed sustainability into their core strategy, rather than treating it as a separate entity, shouldn’t we also be applying the same principles to investing practices? Creating separate responsible investment funds silos the approach, when efforts should be focused on encouraging all funds to be responsible and to make this the default option.

Tools for measuring impact

Conversations with clients are also changing, with many requesting the ESG impacts of their investments, yet even ethical funds can find it difficult to provide such information. More tools for measuring these impacts are needed, and consultants need to be skilled on passing on the relevant information and asking the right questions. There are indices out there, but not necessarily related to ESG impacts and no set standard.

Fear of the unknown

Research shows consumers are wanting to invest more responsibly, but with asset managers and pension funds not seeing enough of a demand, there must be a breakdown in communication. In one example shared, when given the option between traditional investment funds, or the more ethical option, the majority of consumers went with the traditional. This could be due to the lack of knowledge and understanding when it comes to the options available. The market needs to be simplified, so it is accessible to all.

2. Is it the responsibility of asset managers to introduce products to market, or is it the role of pension funds to create demand? Is pre-competitive collaboration needed to create the right market conditions?

The role of responsible investors in educating on responsible investing

General consumers aren’t adequately educated to understand the implications of their investments as there is a lack of financial literacy. In part, responsibility lies with the government to incorporate such studies into the curriculum, but those working directly with consumers have an important role. Pension funds should be working with their customers to help drive demand; asset managers also need to come forward with the products. Supply and demand can also work in reverse; a good product, with the right impact measurement tools, can draw in customers.

The absence of data and the role of technology

Technology has many roles to play in helping to drive change. It can act as a means for to inform and educate general consumers on where their money is being invested. Technology will also play a big part in better understanding the data, and finding a new way to measure social alongside financial impact. Investment in developing the infrastructure is needed to support such advances. There are already a number of companies, including Fintechs, testing new ways to bank, who can be learned from.

Working together to better understand the market

Awareness of competition law is fundamental in considering collaboration among asset managers. Although not yet used against those in this field, it shouldn’t be ignored. However, there is importance in bringing together different actors in the industry to get a deeper understanding of the barriers. Asset managers should seek more knowledge on the types of products sought after, and in return asset managers need to educate on their available products and the impacts they bring.

3. What can be learnt from corporates and alternative financial institutions innovating sustainable investment solutions?

The importance of not standing still

Surviving in disruptive and competitive markets has meant that corporates have had to learn to innovate or die, as in the case of Kodak. Whether this be simply the innovation of new products, or a whole business model rethink. The investment industry suffers from the complacency that they’re immune from market disruption. However important to consider banks, who were also complacent in their security but who have seen a rise of Fintechs. Rather than ignore such disruptions, some banks have decided to invest in and learn directly from them. Those working in investment should be doing the same.

Building trust

Trust in the sector is still suffering, and until that trust is rebuilt, engaging stakeholders will remain difficult. Corporates have experience of rebuilding trust through communications and good products. Such an approach should be used by the investment sector.

Guiding the way for corporates

It’s not just the investment sector that can learn from corporates. It works the other way around with the investment industry guiding corporates on the responsible way to act, encouraging Integrated Reporting, and by their own governance and business practice. It is also not enough to dispel those acting irresponsibly in business, they need guidance and stewardship.

Thanks to Jane Wood, Business in the Community, for chairing the discussion, to Steve Waygood, Aviva Investors and Andrew Hinkly, Anglo American Platinum for helping to lead the discussion and to Responsible Investor as our partners.