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Responsible returns – Meeting client utility

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by BITA Risk
| 15/09/2023 10:30:00

This article follows a high-level assessment of Responsible Investing by Daryl Roxburgh, seen here. In aiming to maximise client utility, BITA Risk®, part of the corfinancial® Group, considers three key questions associated with the challenges of implementing Responsible Investment:

  1. There has been much debate as to whether ESG is good or bad for performance. ESG is a very broad set of disparate metrics, and like any other metric for assessing investments, they are useful but will not be applicable for all sectors all of the time in terms of driving performance - How can they be best used?
  2. The balance required between achieving return and meeting responsible objectives varies significantly across clients, as does personal perception as to what a responsible objective is. From a wealth manager’s perspective, this could become a logistical nightmare, but it does not need to be - How can these preferences be managed?
  3. Many firms have thought long and hard about ESG and have created considerable research and insight. This creates a positive point of differentiation for the fund manager, as long as this is demonstrated to the client - How can this be capitalised upon?

Investors, particularly younger ones, now hold ESG standards to be as important as performance; a recent survey by asset management firm Amundi and the Business Times found that 82% of Gen Z and close to two-thirds of young Millennial investors have exposure to Environmental, Social and Governance (ESG) investments. Combined, Gen Z and Millennials account for 43% and 49% of the US and global population, respectively.

This trend is only set to continue, particularly as more wealth transfers to these cohorts.

The adoption of SFDR disclosure regulations in the EU has also helped to move awareness up the agenda. Fund managers are required to disclose how sustainability risks are considered in the investment decision-making process.

The International Institute for Sustainable Development sees the market for ESG-mandated investments reaching U$160 trillion by 2036, rising significantly from U$30 trillion in 2018.

But how can fund managers actually demonstrate that they have woven ESG and climate factors into their research processes and considered them in the same way that they would incorporate things like risk and suitability?

The key, we think, is to support the investment manager and client and make a good outcome more likely by putting in place a robust analytics and tracking system. This should focus on the ESG factors of a portfolio together with traditional risk and fundamental analytics in the context of the client’s risk and suitability profile and financial objectives.

We think of this in three processes and report sections, which will drive investment returns and meet client objectives, as well as improving client communication and demonstrating the actions of the firm.

One: Risks and opportunities: A firm should determine which ESG factors are considered as risk and opportunity signals – and this will vary by sector. In many cases, these are already embedded in the investment selection process. Their use should be extended into an ongoing process, making use of data monitoring and management to provide individual client portfolio reviews and warnings if an investment’s score has changed or there is a conflict with the client’s mandate. This should equip the investment manager to demonstrate to the client how the firm’s responsible investment process has been applied to risk management and return generation within their portfolio. This also adds the ability to flag any issues and take evasive action as soon as possible - again, this comes down to being able to show that the best outcome was sought in good time for the investor. 

Indeed, ongoing testing of ESG factors against the client mandate alerts to foreseeable harm that can be mitigated or documented.

By identifying and managing these return risks and opportunities and reporting a firm’s view of individual investments in the context of the client’s portfolio, the firm demonstrates a true value add and improves the investment narrative for the client.

Two: Personal preferences: The demonstration of the firm’s approach to responsible investment will partly mitigate the challenge of too many client-specific preferences. Where clients require further restrictions, these should be precise and confirmable and link to the metrics that a firm can access. This structured data could then be used to automate portfolio reporting and monitoring against client preferences and provide checks and balances in the investment process.

ESG reporting should be more than a compilation of figures and measurements. There must also be context around ESG efforts to provide perspective to the client. By recording preferences in this way, the narrative could be focused on the client’s particular interests. Adhering to an existing ESG framework is important at this stage, as it provides guidance and best practices for how the organisation should structure and convey the report and its data.

By following basic steps around data capture and careful matching of client ESG needs, the investment manager would gain much better insight into the client’s needs and objectives and could measure against those parameters at any time.

Three: Stewardship and actions: Being able to successfully show how ESG data has been incorporated into the investment process, which, together with client preferences, are monitored on an on-going basis, could only be positive for the wealth manager’s reputation. The next step is demonstrating the firm’s active investment approach. What has it done to push responsible agendas within the invested companies, and how has it voted and been active?

This third process and report section really underlines the wealth manager’s commitment to responsible investing. By relaying to the client what actions the firm has taken in respect of investments the client has held, would further strengthens the investment narrative.

However, it also has another positive effect; that of influencing positive change within the corporate world. Indeed, the influence of any wealth manager is not to be underestimated and can act as a force for change – companies that do not behave in line with expectations can expect disinvestment and suffer financial loss as well as damage to their reputation. That is no laughing matter! Think Uber - it has fallen out of favour due to numerous accusations of sexual harassment and discrimination within the company, as well as negative attention over the poor treatment of drivers. VMware meanwhile saw its reputation dip off the back of a lawsuit alleging fraud, financial impropriety, and sexual harassment. Boohoo’s reputational damage has been intertwined with concerns about the company’s business practices and labour conditions at its suppliers.

Ultimately fund managers who want to be successful in the future need to equip themselves with the right data, tools and reports to accurately describe both the firm’s integrated approach and implementation of the client’s parameters when it comes to Responsible Investing. They need to be able to prove investments match that on an ongoing basis. Doing so requires a systematic approach, accurate data and dynamic tracking so as to be able to demonstrate that the Responsible Investing was taken care of as much as the Return on Investment. In doing this, the firm would add to the client utility through Responsible Investing, rather than just meeting regulatory targets.

If you would like to discuss any of the points raised here, please contact us at or see more information on our solution here.

Our final piece on this topic, Responsible investing – Putting theory into practice, will reflect on how companies can resolve many of the requirements raised in this article.