3 steps for asset managers to advise responsible investors effectively

With institutional investors looking at ways to invest more responsibly, they may struggle to navigate the complexity of regulatory requirements, stakeholder expectations and sustainability standards in today’s dynamic environment.

According to a Morgan Stanley survey, more than 75 percent of asset managers expect sustainable assets to increase over the next two years but data proliferation, greenwashing and regional differences are major challenges for institutional responsible investors. In addition, there’s no consensus among institutional investors on certain issues such as the use of carbon offsets, the survey noted. 

So how can advisers make the case more convincing and help institutional investors avoid confusion and leverage data effectively? Daniel Ingram, head of responsible investing for North America at Aon, identified three important steps to follow at a recent Impact Leaders Lab event.

Step 1: Provide consistent advice  

Whether they’re managing a university endowment fund, a non-profit, or a pension fund, trustees are making long-term strategic investment decisions and there are competing priorities for their time and attention. “There are a huge number of regulations around how trustees need to think about managing and overseeing those assets, with a very clear established framework on what it means to be a fiduciary,” Ingram noted. “The trustees of a retirement fund, for example, are trying to ensure they’re able to sustain the growth of investment portfolios to pay beneficiaries their retirement savings.”  

As trusted advisers with relationships going back anywhere from five to 20 years, it’s important that investment consultants provide consistent advice. This applies to views about the financial materiality of ESG risks in certain industries, or the rising risk of economic losses from physical impacts from climate change.

Above all, it’s important to be clear with clients that each responsible investment approach, whether it’s screening, integration, impact investing or stewardship, has different goals, impact and implementation options. For example, a trustee may delegate day-to-day investment management to an asset manager who may assess the landscape for climate change and regulations around fossil fuels, and that could influence decisions about which energy sector securities have the most attractive expected returns. This approach is different from, say, investing with the goal of having a real-world impact on climate change. Advisers need to clearly distinguish these two strategies and provide advice that’s consistent with the investor’s objectives.  

Step 2: Build trust and consensus with bespoke guidance 

There’s no one-size-fits-all when it comes to advice on responsible investment. That’s why Ingram prefers to kick off conversations with a questionnaire digging into each investor’s objectives and goals, their baseline grasp of terminology, and even how their own personal investment views may differ from their role as a fiduciary.

Ingram says it’s important to recognize diverse views and stakeholders involved in the process. Peppering a pitch with industry acronyms or specific, unexplained references is likely to leave some investors confused, overwhelmed or – worst of all – uninterested. “It’s important to step back and have very individualized, very unique, very personal and educational conversations with clients from the outset,” Ingram says. “This will help us understand to what extent an investor is trying to align their portfolio with their values, make a real-world impact, or simply to consider financially material ESG factors to make more money.” Each would be associated with different investment implications.  

Step 3: Use data to make your case 

As ESG professionals, we can be great at winning over hearts and minds. But when it comes to investment, there is no substitute for cold, hard facts. “The questions from investors have always been, ‘Can you put some numbers on it?’ ‘Can you quantify this?’ ‘Can you show me the money?’ Some might say, ‘If you can’t show me the money, I’ll show you the door,’” Ingram said.

Available data to draw upon here is twofold: first it can highlight the financial risk of inaction, and second, it can show the potential for long-term financial returns and impact from successful actions, such as investing in the energy transition. Although most conversations center on commercial risk for corporations failing to transition away from carbon-intensive technologies, there is less focus on the potential returns from those that invest directly in the same carbon-reduction technologies. That unexplored upside is crucial for those interested in responsible investment to know about — while also maximizing returns. 

Of course, the potential returns heavily depend on an investor’s specific investment strategy. If that involves purely excluding certain investments that conflict with the investor’s values, for example, the portfolio may be less diversified with lower risk-adjusted expected returns. And don’t rely on individual case studies as a reliable source of data. “It’s no good showing the client one company out of 7,000,” Ingram said. “What we have to do is draw out trends across a much bigger data set.” 

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