A paper from Ben Caldecott and Dane Rook lays out why investment consultants are not having a bigger influence on the uptake of green investment practices by asset owners.
Investment Consultants and Green Investment: Risking stranded advice?, Ben Caldecott and Dane Rook
A key tension underpinning the relationship is the extent to which it is demand from asset owners or supply from investment consultants that determines which issues are addressed.
Lack of demand
The study identifies a lack of demand by asset owners, not due to a lack of awareness on green issues, but factors including: the belief that green issues aren’t sufficiently material, the (false) belief that their fiduciary duty means they have no legal ability to act on sustainability issues as well as underresourcing and a desire for minimal governance structures.
Asset owners also often have misaligned beliefs, values, and investment policies. Investment consultants can help asset owners address these misalignments, but it may not be the place of investment consultants to influence what asset owners’ beliefs and values should be in the first place. The authors see investment beliefs as the mechanism to help investment consultants address all material issues, rather than simply the issues that asset owners feel are immediately material at any given point.
Reluctance to supply
Study participants also agreed, however, that investment consultants have a duty of care to present their asset owner clients with issues they perceive as material, even if those issues are not specifically requested by their clients.
Yet investment consultants are loathe to push issues onto asset owners if the client doesn’t believe an issue is material to them. This leaves the balance of power with asset owners in terms of how issues are broached and prioritised in typical investment consultant-asset owner relationships.
There is similarly a desire by investment consultants to deliver products and services that fit with labels used by asset owner clients (particularly those appearing in mandates), and green investment lacks a standard set of labels. Differing use of terms can also lead to disagreement and misunderstanding between asset owners and investment consultants.
The danger for investment consultants is that in not forcing sustainability onto the table, they risk stranding their most valuable asset – their reputation. When the long-term changes materialise, asset owners may find their investment consultants culpable for not having sounded the environmental alarms loudly enough when they had the opportunity to do so.
Other factors that hinder investment consultants’ ability to influence the take-up of green investment practices, include:
- the dominant portfolio-construction paradigm based on asset classes may be overly restrictive – by focusing on risk factors rather than on asset classes, investment consultants could achieve more progress;
- the major threats from environmental change aren’t easily quantifiable so any measurement is viewed as subjective and often given less attention by investment consultants;
- the relatively small margins investment consultants operate under and a lack of specific green investment fees might be driving their lack of innovation.
By collaborating with one another, investment consultants can share expertise, time and experiences to build pools of resources, achieve breakthroughs in products and concepts that would be unreachable separately and correct misinformation, such as misplaced fiduciary duty beliefs. Though there are hurdles around working with competitors, it could help preserve the collective reputation of the industry.
Investment consultants can also add substantial value, and command higher fees, by developing expertise in potential long-term policy and regulatory reactions to sustainability issues, and taking a proactive role informing policy makers and regulators on policy and regulatory moves that may help promote green investment.
Evaluating investment consultants
The authors created a checklist and scoring system to give asset owners a rapid indication of how expert an investment consultant is in green investment issues, and how wellmatched an investment consultant is to address an asset owner’s specific green investment needs.
The checklist tests, for example, if an investment consultant is:
- familiar with current research and able to instantly identify who in their organisation is the relevant expert;
- a leader in initiatives promoting green investment practices;
- closely involved in developing scoring methodologies, indices or new green investment products;
- integrating green principles throughout their own organisation.
The authors developed a step-by-step procedure to order asset owner’s green investment ambitions, relative to its abilities to achieve those goals, and then establish which investment consultants can provide green investment solutions. An asset owner’s needs could include:
- selecting green investment funds;
- assessing political opportunities connected to green investment legislation;
- scenario planning for sustainability threats;
- help in recruiting teams with green expertise.
The toolkit can also be used to evaluate or benchmark investment consultant performance on non-green issues, mandate design, budgeting or costing exercises and analysing decisions on in-sourcing advisory functions.
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RI Quarterly vol. 9: Investing in a low-carbon world
RI Quarterly vol. 9: Investing in a low-carbon world
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Are investment consultants' reputations the next stranded assets