Hugh Wheelan: The CFA as seen by a dedicated follower of ESG fashion

A debate at last week’s CFA conference revealed a confused view on whether ESG is ‘mainstream’ or not.

After years on the finance margins, am I the only one feeling a little nervous about being told that ESG is now ‘mainstream’, and worse still ‘fashionable’? I guess I’ve always preferred the sense that the truly sartorial don’t need to be told; trend setters/predictors are ahead of the curve.
Anyway, I digress. At the CFA’s European investment conference last week in Paris, a room full of CFA charter holders, when asked whether ESG was now the norm came out 51.6% in favour at the start of a debate on the question: “Is ESG now mainstream”, albeit with little definition of what mainstream actually means, or ESG for that matter.
Great, you say….just where the trend-setters wanted ESG to be. Not so fast fancy dresser!
In a challenger pushback, Sony Kapoor, Managing Director of Re-define, the business/finance think-tank, said that if ESG was now de rigueur you’d expect to see a noticeable change in how capital is invested by investment managers. He argued there had been none. ESG, he said, was a hollow, meaningless fashion label, obliging fund managers to do nothing other than say they ‘do ESG integration’ on the ticket.
In ESG’s defence, Mirjam Staub-Bisang, Head ofBlackRock Switzerland and chair of the Profond Pension Plan, said there were few institutional client conversations now without ESG. Sustainability strategies, she said, ranged from exclusion to best-in-class, but largely resided in expanded ESG research analysis leading to improved risk/return investment decisions for long-term allocations. It was mainstream alright, she countered. Clients, she said, were now telling managers they will lose their money if they don’t integrate ESG credibly into research, due diligence and investment actions such as voting and engagement with investment companies in both passive and active portfolios. Last week’s announcement by Sweden’s AP1 seems to bear this out, at least among the leaders.
Kapoor came back saying the rhetoric was rife, but that the ESG emperor had little in the way of clothing.
He argued that RI/ESG staff made up for a tiny portion of fund manager staff, tended to be junior in rank and had scant budget and little steer on actual strategy and money decisions. Initiatives like the UK Stewardship Code, he said, were barely worth the paper they were written on, and mostly overlooked by managers. Worse, he said, ESG was engendering a kind of post hoc rationalisation of investment, where ESG professionals say ‘I told you so’, without being able to demonstrate
serious, empirical ex-ante data for value. Kapoor made little attempt to rationalise the proliferation of sustainability themed funds, sustainability-based managers or the rapid recent growth of ESG teams and their rise in profile. But, he has a point about the ‘reality’ of ESG integration: how would most investors really know whether a manager was good or bad at ESG for better risk-adjusted returns?
By the end of the panel, the majority of the CFA audience had flipped to almost 55% against ESG being mainstream….a fickle CFA crowd!
What’s going on here?
Well, I think, in reality we’re at a fashion ‘inflection’ point. The fact that circa 50% of CFAs believe ESG is mainstream acknowledges a profound change in the acceptance of what was once-called non-financial data, as, ‘financial’, and relative to investment decision-making. A recent CFA study showed a clear majority (85%) of CFA holders in Europe ‘agreed’ or ‘strongly agreed’ that taking ESG matters into account in investment decisions is appropriate for institutions such as pension funds. Link to RI story
But, everything is contextual. And asset management is itself undergoing tectonic changes. One is the move to passive as the active ‘value creation’ proposition is tested; this is obliging stock pickers to refocus on where value creation lies for them. If they can’t demonstrate it, they’ll slowly suffocate. Another is fees, and the focus on reduction thereof, which is in part driving an in-sourcing trend. The bottom line for funds houses is being squeezed. A third is the commoditisation of index funds and ETFs towards a low or no-charge model. Fourth, what is the ‘brand’ of a fund manager if it can’t be clearly differentiated by performance? And what does this meanin a world where the savings decision is becoming increasingly ‘personalised’? How will you choose who runs your money?
It’s up to the asset owners of this world to decide if they are getting value for money from active fund managers (in all asset classes) over time, and whether they think issues like good governance and board insights on the huge consumer, technological, environmental, demographic, business and political shifts of our time (many linked to sustainability issues) are relevant to the companies and assets they invest in both actively and passively over the medium-longer term where value in companies is really generated. The increasing empirical evidence (in a strangely under-researched area relative to its importance) shows they do. Asset owners are starting to recognise this, but things move slowly in the buttoned-up, conservative institutional investment world; more used to business attire than funky shirts and blouses.
ESG demands a shift of investment focus and business model. So it’s easy to see why it has become ‘fashionable’ for fund managers right now, rather than deep seated. Few fund managers want to look bad, hence the ESG trend outstripping the reality..for now. But trend setters know who is really wearing the style, and who is just putting it on. If ESG is a fad, then why is the supposedly rational investment world wasting its time talking about it all? It’s because it’s not. Investors know sustainability comprises some of the biggest secular trends that are playing on long-term strategic decisions and increasingly affecting shorter-term tactical bets. Mainstreaming is just the realisation that what yesterday’s smart dressers were wearing, is now all over the High Street.