PERSPECTIVE3-5 min to read

Can asset management battle today’s big social challenges?

Willem Schramade explains the role clients can play in helping to create investment solutions to societal problems.

15/11/2023
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Authors

Willem Schramade
Head of Sustainability Client Advisory

Are asset managers doing enough to meet today’s big social challenges? Do they make a difference in battling inequality and climate change?

For some of our clients among foundations and charities, the answer is a resounding no. In their view, we are in the perfect position to shift capital away from destructive activities towards those that solve these challenges. And in their view, we are not seriously doing that.

At the other end of the spectrum are those who argue that we cannot do anything anyway. In their opinion, financial institutions are simply takers of projects in the market: it’s the product markets that decide the outcomes, along with some nudging by politicians.

So, who is right? What can we do? And how can our clients influence this?

We are the system

Let’s first consider the perspective that we are powerless as individuals to achieve social change. The American novelist Jonathan Safran Foer powerfully dismantles this perspective in his book We are the weather. Saving the world begins at breakfast.

He argues that social change is caused by multiple chain reactions that occur simultaneously. And that the apparent impotence of individual action is in fact every reason to try. He says: “We aren’t powerless within our ‘complex, recursive dynamic’ with ‘internal and external drivers’ – we are the internal drivers.”

This also applies to asset management: there are indeed many things that we could do differently – better - with more attention to societal outcomes. Safran Foer’s view is backed up by a large body of academic literature that describes how transitions work and what various actors (including financial institutions) can do to affect them. 

What are the limitations?

However, that academic literature also indicates that change is slow and bumpy. Patience is required, and there are (fuzzy) limits to what we can do.

First, we are operating in the context of competitive markets, where more sustainable practices may be (or appear to be) so costly as to be prohibitive.

Second, we need to meet client needs and demands, including expectations on low costs, low risk, and high financial returns.

Third, like any industry we have cultural legacies (practices, mindsets) that hamper change and innovation. For example, it is very hard for finance professors and investment professionals to envisage a different goal than alpha maximization or tracking error minimization – even if impact is explicitly indicated as an important goal. 

Pushing the limits

Over time though, we can push those limits. We can develop new methods, train our people, develop new products, etc. For example, at Schroders we developed a tool called SustainEx that measures companies’ externalities, which we use in our investment processes in a bottom-up way.

And top-down, we set our Plan for Nature, which outlines our whole-business approach to managing nature-related impacts and exposures, from research and analysis and engaging with companies, to developing nature-based investment solutions.

Shaping the field

But we can achieve the most in cooperation with our clients. As Safran Foer argued, systems change results from a complex interplay of forces. With increasing client demand for better societal outcomes, we spend more time on it. Some clients challenge us to such a strong degree that they inspire us to develop new and more rigorous methods.

Indeed, Marti et al. (2023, ‘The Impact of Sustainable Investing’) find that an investor’s impact not only consists in steering capital to more sustainable assets, but also in “shaping the field”: creating new ways of doing things that help fuel a movement of others following suit, resulting in a lot more capital flows into sustainable assets.

Clients inspiring us to do better

A recent example was a pension fund asking us to build an equity portfolio that delivers positive societal outcomes and 10-year market rated returns. This client request forced us to define and measure various types of positive societal outcomes, as well as how to project and manage them going forward.

We gathered in cross-functional teams and brought fresh thinking from various angles. It also allowed us to quantify the trade-offs involved and show the client what levers they could pull. It inspired us to develop new solutions focused on societal outcomes and bring them to other clients across the globe.

So, in asking this question, this pension fund was not only improving the effects of its investments, but it was also influencing us and potentially other clients. 

Another example of clients inspiring us was the “ESG Olympics” organised by three foundations. This was a public investment management tender that challenged would-be managers to impress the judges with their environmental, social and governance (ESG) integration and impact.

In the end, Cazenove (part of Schroders) won, and the organisers became cornerstone investors in launching a multi-asset sustainable fund for private clients and charities. In doing so, these foundations acted as catalysts, allowing us to accelerate capital into sustainable solutions. But they also challenged us (and continue to do so) to adopt a new consultative approach to hear client voices.

The great thing is, once clients have influenced us, it not only affects our relationship with those particular clients but has much broader effects. It helps us to improve with benefits to all clients. So, if you want better societal outcomes from your investments, please think beyond the technicalities of the portfolio itself. You can go the extra mile and ask us (and our competitors) ambitious questions, challenging us to get better.

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Authors

Willem Schramade
Head of Sustainability Client Advisory

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