Investment management 'not fit for purpose' in delivering sustainable wealth creation

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The 300 Club is an influential sustainable investment professionals’ group

The overall business model of the investment management industry needs to be reengineered to deliver sustainable wealth creation that spans decades, not quarterly targets, according to the 300 Club.

In a white paper published yesterday, the global sustainable investment pressure group said the industry’s business model was “not fit for purpose” and called for all links in the investment chain to work together in order to deliver positive change.

Portfolio objectives are too often focused on short-term horizons and need to be rewritten to focus on long-term gains over a period of at least seven years, it said, while also settings levels of absolute risk to capital and time horizons according to the investors’ needs.

It also called for the duration of active managers’ contracts to be aligned to the longer-term objectives of mandates, and for long-term absolute return, control of absolute risk, and transparent reporting of stewardship outcomes against objectives.

Founder of the 300 Club Saker Nusseibeh, who is also international chief executive of investment giant Federated Hermes, said current time horizons “skew your concept of risk and we still as an industry have a short-term horizon serving long-term needs”.

“Active ownership has to mean something more than buying and selling shares,” he added. “It must mean active stewardship. We have a lot more evidence that shows real active stewardship and integrating ESG [environmental social and governance] over the long-term not only produces impactful results for the community but enhances returns for the beneficiary in the long term.”

The report also called on passive managers to work collectively to exercise their stewardship responsibilities, with fees and manager incentives also reengineered to promote the objectives of sustainable wealth generation.

300 Club chairman Stefan Dunatov – who is also executive vice president of investment strategy and risk at British Columbia Investment Management – said it was important that all asset owners and asset managers focused on the end beneficiary.

“The current pandemic has created a moment for soul-searching on the state of the investment industry,” he explained. “During this crisis, we have all been reminded that companies should not just be profit-generating machines but purposeful providers of long-term sustainable wealth creation and solutions that benefit the individuals that make up society.”

“The means to achieving the goal of sustainable wealth creation is the careful stewardship of investors’ capital in the way it is allocated and active stewardship of those investments once they are made,” he added. “Both active and passive managers can play a vital role by working together collectively on this.”

The 300 Club is aiming to “facilitate a co-ordinated process” which allows for all investment chain links to implement reforms to mandates and incentives to align with sustainable wealth creation, he said. These include providers of capital, asset owners, asset managers, and the companies he added.

Heavily de-risked pension schemes can also play a role, even if they are mostly invested in fixed income instruments, Nusseibeh argued, noting that some companies have begun issuing bonds where outcomes are aligned with sustainability goals.

Although he recognised it may be a “bit more difficult”, collective action can work via gilts or other government bonds. Nusseibeh said investors must recognise they are not in competition. “Stewardship is very much a part of bond investing… as a pressure mechanism.”

A version of this article originally appeared at Professional Pensions.

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