In October last year Marisa Hall painted a compelling challenge to asset managers of all types: adopt system-level thinking to create a more sustainable world. She painted a pathway for how this could be achieved, with culture and measurement key enablers. However, I found myself pondering the role of government policy as enabler or inhibitor.

The playbook of defining events is updating in real time

Hall began by detailing issues which shaped the present views of the Thinking Ahead Institute (TAI), where she is co-head. The first was Davos in January 2020, where a broad economic forum was dominated by the issue of climate change. The second was the coronavirus outbreak, and the third the unlawful killing of George Floyd in May.

While each is individually important Hall contests that in aggregate, they form a mosaic of a world in need of strong leadership to become more sustainable. This playbook is updating all the time and it would be easy to update this with a new but similarly impactful set of recent events.

TAI promotes “ESG 3.0”: a framework of system-level investing whereby investors seek to change the system in a way that delivers long-term financial benefits and a more sustainable world.

Hall cites culture and the ability to measure and implement as the two key enablers.

TAI has a long history working on the development of investment culture and finds culture to be integral to enduring success. Hall highlighted the importance of shared language and a narrative, while identifying intentionality, authenticity, and transparency as features of cultural leaders, both individuals and firms. All of this helps to break away from the tactical (short-term) and focus on the strategic (long-term). Hall’s observation that inclusion and diversity are part of maximising collective intelligence in strong cultures resonates.

From there the challenge is to integrate measurement with purpose and vision.

For a long time, TAI has espoused the benefits of a total portfolio approach (TPA) compared to an SAA (strategic asset allocation) approach. Hall believes it lends itself to meeting the challenges of ESG 3.0. Specifically, TPA more naturally lends itself to the complex task of integrating multiple objectives (financial, sustainability and impact). Measurement is a difficult area and can be improved in many areas including participation and standardisation.

The multi-faceted role of government

How important is the role of government in generating a more sustainable world? Utmost in Hall’s view. If one could allocate influencing power using 10 units, then TAI’s view is that four would go to public policy, three to corporations, two to investment organisations and one to individuals.

The interactions between influencers in a framework such as this are immense. Positive feedback loops generate a momentum effect which elevates the possible contribution of all influencers. By comparison, negative interactions constrain the potential impact of each influencer.

Consider the role of public policy: direct impact comes in areas such as how it spends tax-payers money (e.g. into projects which contribute to a more sustainable world) and the policies it sets (e.g. policies to price externalities). Additionally, public policy has the potential to magnify or constrain the potential of other influencers. Relevant to my reflections on Hall’s Big Ideas session is the impact loop between government and investment organisations. The example of governments’ influence on how pension capital accounts for sustainability is pertinent.

Presently there are no examples of pension systems which value anything other than financial outcomes. For many countries ESG is viewed as a risk and an opportunity.

This acts as a ceiling to the aggregate contribution that can be made by investment organisations. Functionally there is no need to establish the complex trade-off between sustainability impact and financial outcomes. The cultural challenge relates to fostering talent in a constrained environment. There is also a flow-on to the loop between investment organisations and corporations: if funds are not required to measure impact (positive and negative) then there will only be limited pressure on corporations to participate in collective standardised data provision activities.

Floor or ceiling?

Investment organisations are approaching a crossroads. The risk / opportunity view of ESG will persist as a minimum standard (assuming ESG policy changes in the US change following Biden’s election win). So, should this represent the floor or the ceiling for investment organisations?

Attempting to do more carries multiple risks – regulatory and career are obvious examples. But letting the risk / opportunity view be your ceiling also carries risk in the areas of culture and staff retention.

Let’s not forget the positive feedback loop that investment organisations have into government. Being able to clearly explain the benefits of a more sustainable approach to the use of capital may assist government to mandate sustainable investing more explicitly. A higher floor and a higher ceiling!

Marisa Hall and TAI present a clear pathway for asset managers to invest sustainably: culture and measurement / implementation. My reflection is that while globally government policy has enabled (through acknowledging risk and opportunity associated with ESG) the acknowledgement of ESG-based risk and opportunities, there is another round of enablement: accounting for sustainability in the measurement of outcomes. There is a challenge for investment organisations to explain this opportunity and devise workable solutions for effective government policy which preserves accountability. Such an outcome has the potential to set in place a significant uplift in the contribution that investment organisations can make to a more sustainable world.

David Bell is executive director of The Conexus Institute.

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