Elizabeth Corley, chair of Schroders plc and Impact Investing Institute, sees global fund managers approaching a crossroads, where divergent regulation on sustainability issues will make it difficult to satisfy asset owner demands for systems thinking and universal ownership.
Elizabeth Corley has a unique perspective as chair of Schroders, a financial services company with strong sustainability roots, an LSE listing and a global reach.
Corley points to encouraging progress among funds management firms in moving from philosophy to practice as they integrate sustainability into investment processes. But a challenge lies ahead for global funds management firms, borne from geographical disparity in regulation.
“When you have regulation, and particularly prescriptive regulation which is divergent or at least inconsistent, it is a challenge,” Corley tells Top1000funds.com during an interview in Schroders’ London headquarters.
“You might have a common investment philosophy, a common investment approach and in different countries regulation implies different colours.”
Recent conversations with large, sophisticated asset owner-clients have raised what Corley thinks is a mounting issue. These asset owners are embracing universal ownership and systems thinking, encouraging other actors in the system to do the same. But for various, credible reasons global managers are unable to invest sustainably across all portfolios or for all clients, or in all regions.
“Clients ask us this and I say because [ESG] is defined differently by different regulation. And it has to be evidenced from a compliance and risk point of view. Additionally, some clients simply don’t want us to invest that way,” she says, adding this is a potential tension in the industry.
Some large asset owners that practice the total portfolio approach and universal ownership – advocated by the CFA Institute’s recent paper Net zero in the Balance: A guide to transformational thinking authored by Roger Urwin and to which Corley contributed – are of a scale to recognise the holistic benefits of systems thinking that could flow through to capital markets and the wider world.
“They’re expecting asset managers to be doing significantly more than just fulfilling their mandate,” Corley says. “I think that’s a really interesting dilemma coming down the track and it will create conflict for portfolio managers.”
Ultimately this could lead to the possibility of real division in the offerings of global investment firms depending on the market.
“It is already complex because of the proliferation of regulation, and it will get more complex. I think the managers who are trying to do everything everywhere will really struggle,” she says.
“I think that’s the debate we should be having. What I don’t agree [with] is that you change your beliefs, your thoughts, or you change your investment approach. If you genuinely believe that climate change and the societal consequences of it are a material risk factor, as the CFA Institute Net Zero report says, it’s your responsibility to engage around that and discuss it and understand it.”
Discretion required
But what an investor does about it, and how they do it, requires discretion.
“Then whether it is the responsibility of the funds manager, the client or the regulator needs a robust discussion,” Corley says.
“That is a debate that hasn’t been had, or at least not in a consistent way, where there’s an architecture around the discussion. It happens individually but there’s no architecture to enable that conversation.”
Describing a potential consequence as a bifurcation is too black-and-white, according to Corley.
“I see it as something that gets more complex, like multiple major branches coming out of a single trunk,” she says.
“The trunk is absolutely integral and the roots that go down are absolutely integral.”
These conversations are only happening with the most sophisticated clients which have embraced systems thinking as outlined in the CFA Institute Net Zero report.
“They have gone through what the CFA Institute’s report has described as the philosophy of accepting they are part of a system and have responsibility for systems change, and that goes beyond how they mandate. Then they are bound to ask other parts of the system what they are doing,” Corley says.
The mindset advocated by the CFA Institute’s paper will increasingly force people to have this conversation, she says, and to ask about their role and the role of others in the system.
“I think it’s a dilemma,” Corley says.
“Part of systems thinking is about sharing. If this continues, I think the question about the shape of the curve is pretty profound. If it continues to develop and evolve and 50-60 per cent of asset owners want this to happen then how are we going to have these debates?”
Corley advises fund managers to be clear about their strategy and transparent with clients, and to provide evidence about how they are contributing to wider systemic change. “But don’t pretend you are going to do something if you are not,” she says.
Networks and coalitions
Corley, who is also chair of the Impact Investing Institute, says she is now having as many conversations with banks as with asset managers, around their balance sheet carbon exposure and what they are doing with their lending portfolios.
“So I think the wider financial system is converging” she says. “Ultimately there is not going to be a global coherent approach to pricing or taxing carbon. So there is an expectation for capital markets to do that.
“Asset owners and managers are critical but are only part of the capital markets system. You’ve got this massive financing industry through the banking sector, lending sector and private debt.”
Critical to success across the entire industry, she says, is a speaking common language, and TCFD and TNFD have been useful in that respect.
“Where they did take us forward is to a more common language, even if it’s simplified,” she said. “It gave guidance on how corporates should report, how financing should be done and the accountability, and that’s helpful.”
Where progress could be made is using the information across the capital stack such as the established databases that global reinsurers and large insurance companies have on weather and underwriting.
“This is where AI and large language models can use that information and hoover all that up,” she says. “That would be very interesting. There is also a role for academia to make cross connections of all that information.”
Codification and integrity of information and data are essential, Corley says, and equally important is aligning governance structures to methods of sustainable investing.
“The role of risk committees, internal audit, et cetera, need to move in lock-step to make sure you are not getting ahead of yourself,” she says.
Training and education are key, she says, as is the role of the CFA Institute and professional standards and practices.
“We need to be working to a common set of standards and practice that the industry can rely on and be a profession,” she says.
Room for failure and success
But there’s a balance, because Corley believes that too prescriptive information, process and action are not the only ways to drive change.
“There is a balance in rigorous legislation and technical standards and being over prescriptive that it gets in the way of change,” she says. “You need to leave room for humans to be innovative, and an evolution of the standards.”
There is a risk of evolution being stymied, she says, if regulation is too prescriptive, and there needs to be space for experimentation and rapid failure.
“As Roger says we are going through one of the biggest changes in history,” Corley says.
“The UK regulator calls it a sandbox mindset. You have to be able to try and fail fast, and learn and move on. It is not about going slower, but being very thoughtful before you lock something down.
“The right pace is doing the thinking and allowing experimentation and radical thinking in a safe environment where no client money is at risk. That’s important.”
