A view on ESG in the investment space
In this Q&A, Hedgeweek speaks to Harbour’s Anne-Marie Leadbetter on the various aspects of ESG in the investment space, shedding light on regulation, DE&I and opportunities for service providers.
There has been an increased interest in ESG – where is this coming from?
ESG was gaining traction prior to the pandemic, but it seems that Covid-19 and the global social economic environment, generally, has caused everyone to take another look at how we are treating the environment and each other, to look to try and do better. There are several motivating factors, but in the investment fund industry investors are the root force behind this acceleration as they now want more from their investments than just a good return at any cost. It is predicted that the number of ESG compliant products will outnumber traditional products in the future. Investors are evaluating the funds in which they invest by including environmental, social and governance (ESG) factors. As a result, investment managers are introducing these same factors as part of their analysis of the investments in their portfolios. ESG has become a differentiator for investment managers trying to attract capital into their products.
So how can an investment manager differentiate themselves?
The simplest answer here is for investment managers to structure their portfolios with investments that consider ESG factors. ESG criteria will need to be added to the investment risk assessment to help select appropriate investments, but this is only half of the picture. To truly differentiate themselves, investment managers should look within their own management companies to ensure that they themselves are following ESG principles as much as possible. A detailed look at how they are running their own businesses is needed, including what policies and procedures they currently have in place. This can start by looking at the energy efficiency of their office space, increasing recycling, and reducing paper usage where possible for environmental impact. Ensuring a diverse and inclusive workforce, offering flexibility in the work place to increase staff wellness and retention, and making charitable donations while supporting volunteer efforts can make a positive social impact. Good governance practices might include having a strong office culture or code of ethics in place, a business continuity plan, and cyber security in place along with a succession plan.
Is it enough to just say that you have ESG policies and procedures in place or that you have an ESG investment focused product?
No, certainly not. If a fund is marketed to be ESG compliant, then it has to be able to prove that it is – and investors will seek to verify this. This reduces the chance of ‘greenwashing’ whereby a company conveys a false impression that their investments or the company itself is more environmentally sound than it really is. Increased regulation in this area, such as that introduced by the EU, and increased focus by regulators like the SEC will cause greater transparency and help to ensure that the investment manager’s actions match what they are marketing to investors. Investors are requesting more specific reporting and information on how investment managers have followed their policies and procedures that they have in place. So it’s not just enough to say that you have ESG policies and procedures in place or make ESG investments, the investment manager needs to be able to support these claims and report on them.
And what about other service providers in the financial services space?
Investors are increasingly demanding that ESG policies and practices are also implemented by the various service providers to the fund structures. This includes the administrators, auditors, and independent directors. The ESG mentality needs to be pervasive throughout the entire structure to be effective, especially the board of directors that is responsible for the fund and implementing decisions from the top down.
Obviously diversity and inclusion is part of ESG. How important is diversity for a fund board?
Diversity and inclusion are very important for a well-rounded board of directors. This doesn’t just mean diversity of gender and race, but also diversity in professional backgrounds and education to ensure everyone brings a different perspective to the table to avoid group-think, and to best manage the fund. Investors are increasingly looking more deeply at the board composition to ensure that, in addition to being well qualified with their education and experience, the board is diverse as this offers the best possible governance structure.
Does your firm have an ESG policy and what does it broadly cover?
Yes, Harbour has an ESG policy. A good policy is a dynamic document that is reviewed periodically to ensure it is up to date and accurately reflects the focus of the organization. It isn’t enough to set out a policy, but results should also be monitored and if possible measured so that the true impact of any changes can be seen. Key focus areas for Harbour’s policy include environmental goals towards waste management and energy efficiency; social goals including employee benefits, wellbeing and diversity and inclusion; and governance goals including succession planning and business continuity along with financial crime prevention. The reality is that organizations will have different priorities and no two policies are exactly the same. That’s okay – it’s more important that you commit to goals that are achievable for you, rather than setting a perfect but unrealistic policy. We can all make a difference in our own way, we just need to take those first steps and then build from there.