Investment managers are uncomfortable with ethics. Or, to put it another way, they appear more at ease with assessing issues they see as less amorphous, like culture or other key indicators.
Those are some of the findings of the Institute of Business Ethics (IBE) when it interviewed experts about the place of ethics in ESG (environmental, social and governance) concerns.
After interviewing asset managers and owners, investment consultants and other advisers, the IBE found they shy away from any direct talk of ethics because “they find it hard to define and don’t want to make moral judgements.” Investment managers with a more sophisticated approach see corporate culture as a “meaningful signal to gauge whether a company will deliver on its ESG commitments”.
ESG has become the headline issue among investment managers and corporate leaders in recent years. It’s no wonder, capital in ESG funds has now reached unprecedented levels. According to a Bloomberg article, ESG assets under management could reach $53trn by 2025, more than a third of the $104trn in global assets.
Regulators too have thrown their weight behind the drive for ESG as a core part of business strategy. UK companies now have to implement TCFD reports (Task Force on Climate-related Financial Disclosures), EU companies face the introduction of new directives on directors’ duties and due diligence, as well as ESG disclosure rules. The US is currently wrestling with proposals for mandatory ESG reporting.
ESG, ethics and culture
Climate change is, of course, a key driver of focus on ESG, but the pandemic and concern with the wellbeing of of employees, as well a renewed focus on equality after both the #MeToo and Black Lives Matter movements, have fuelled interest. The war in Ukraine and demands for boycotts of companies with Russian interests have added a fresh dimension to ESG orthodoxy.
However, investors say ethics are rarely considered as a part of ESG. Investment managers face significant challenges such as wading through a mass of data that may include conflicting signs; frequent regulatory updates that could “reward the wrong behaviour”; pressure to focus on short-term returns; or an ESG agenda that seems “at odds” with their own firm’s priorities and culture.
According to Ian Peters, director of the IBE, ESG is changing the way companies are assessed and benefits are accruing. “But it is clear that asset managers need help and guidance if they are to benefit fully from the value ESG gives in their decision-making.”
The IBE suggests ESG credentials can be assessed by analysis of a corporate culture to understand the “real priorities and motivations” of companies.
This could include looking at issues such as staff turnover, tracking management promises, action on diversity, adherence to external codes of conduct and the use of ethics codes, as well as many others.
Some have taken the leap to use culture as indicator of ESG performance. Stephanie Niven, sustainable equity portfolio manager at investment firm Ninety One, says the firm has built a new framework for corporate culture assessment when picking stocks.
Bob Wrigley, chair of UK Finance, a body representing banks and the finance industry, says culture will be critical to assessing ESG performance. “ESG measurement is here to stay. If we are to encourage and promote sustainable investment then assessing an organisation’s culture should be a key element of this.”