Creating structure to promote sustainable RI in asset management

Establishing an ESG community that can promote and sustain a long-term responsible investing approach requires an entirely new way of thinking and a bold, public vision that is driven by company leadership.

This is according to Malcolm Gray, a senior associate of The University of Cambridge Institute of Sustainability Leadership (CISL), speaking at a Nedgroup Investments Responsible Investing Workshop, hosted in Cape Town last week. Gray has a geology background which he says enabled him to understand that modern society is not able to comprehend truly long-term time-frames.

“There is a clear disconnect between the way corporates behave and the way the history of the earth implies they should. As a human race, we cannot understand the ramifications of exploitative environmental, social and governance behaviour. I therefore became passionate about finding ways in which shareholder value could be aligned to reflect environmental and socially responsible aims,” he says.

Gray, who spent 16 years working for Investec Asset Management in a number of senior roles, most recently as Global Head of ESG and Portfolio Manager of a number of South African and African Funds took attendees at the workshop through a framework for responsible investing based on his experience. Headvised that responsible investing reporting should be directed to the board in order to hold employees accountable to their objectives and provide the structure to maintain it.

“Implementing a responsible investing strategy that lasts can be done – but you need to have very clear reporting and governance structures within the organisation and it needs to come from the top. The power of leadership to fundamentally shift the mind-set of an organisation should not be underestimated. This can be your most valuable tool,” he says.

Gray’s framework for responsible investing focuses on the core pillars of asset allocation, tools, engagement and review.

Asset allocation: Once a responsible investment strategy has been introduced, it needs to translate into a structured and defined asset allocation process. “This means one needs to consider first of all, a redefined universe of stocks, and secondly, a new thematic framework for asset allocation. This could be focussed on themes such as energy, water, healthcare etc. It is crucial that this is supported by fundamental research, and clear engagement with the underlying management teams.

Tools: If the data required to support the ESG-driven asset allocation does not exist – create it, advises Gray. “Enter partnerships with research companies to make sure you have the right tools so that you can demonstrate what you are doing to the wider business. Independent research reports and indices also keep the history of your decisions and help to identify trends,” he says.

Engagement: An effective responsible investing strategy relies on engagement with internal, external and public stakeholders. “Be clear about what you are committing to, how you will achieve these objectives and still produce shareholder value, and then make sure that you maintain open and honest dialogue with all of your stakeholders,” says Gray.

Review: Any business strategy requires regular and honest review to assess its success and areas for optimisation. “If you have committed yourself to an RI approach in the public domain there is a natural process that will happen in terms of review. But the important thing is that this must happen internally as well – put clear, measurable indicators in place and regularly check outcomes against these,” says Gray.

Gray urges that it is possible to change the system when it comes to responsible investing.

“Responsible investing, if implemented correctly can be strategically advantageous and in fact, in certain markets, ESG is almost a pre-requisite. Furthermore, it gives you access to markets that some competitors cannot get into – and it can be a marketing differentiator.”

Nedgroup Investments plans to host further Responsible Investing workshops to bring together the top minds in the industry and to foster further collaborative discussion on the topic.