One certainty for sure is that the economic impact of the lockdown was sudden and is profound: while the International Monetary Fund’s year-on-year world GDP growth expectation was +2.9% back in January 2020, less than 4 months later it is a daunting -3%1.
To name just a few unknowns: will further lockdown periods be required to contain the spread of the virus and what additional impact will this have on the economy? Will the coronavirus create deeper social imbalance going forward, for example between those whose professional activities can be maintained during lockdown and those who find themselves suddenly out of work? Will this virus, which afflicts people regardless of nationality, social standing or location, and which needs a coordinated global solution, generate isolationism and economic disputes between nations, or will it lead to increased worldwide cooperation and collaboration?
In such a hard-to-read world, investment outlooks from asset managers range from extremely pessimistic (where the only safe place is cash and gold), to pessimistic with a light pinch of optimism. Of course, everyone expects investment managers to publish polished investment outlooks, even if it is incredibly challenging to solve an equation with so many unknowns.
I believe the responsibility of asset managers is actually much broader than that: in a world where so many things have to be rethought, asset managers’ societal responsibility has never been higher than it is right now. In the first part of this paper, I will present support for this argument. I will then demonstrate why Responsible Investment is now needed more than ever before. Finally, tying everything together, I will show how this represents a turning point for the asset management industry.
I can’t think of an industry that has a higher societal impact than asset management. That impact is due both to what asset managers do for the end investors and to the reach of the products they manage.
What they do for the end investors is, for example, helping them reach financial security at retirement. Which, considering the demographic structure of our world, is a huge social responsibility. The products they manage have powerful social impact: funnelling assets to and from companies galvanises the economy, redirects its emphasis and creates jobs. Increasingly, this has a direct bearing on environmental, social and governance matters.
Retirement systems are severely strained. Some of them were already 20% to 30% underfunded before this crisis. With even lower interest rates putting pressure on the liabilities of these schemes, and the asset side having been badly damaged by the recent market crisis, one might wonder whether pension funds, not banks, are systemic risk agents. The social responsibility of asset managers is to help pension funds find solutions that in turn help them meet their obligations.
Millions of businesses around the world, both public and private, need financing to survive and to provide employment opportunities to the population. And, as we will see below, this crisis has brought to light a whole set of new questions about Environment, Social and Governance factors, that asset managers need to act on now.
Many articles have already been published about the soaring demand the coronavirus crisis will have on ESG investing.
First, for spiritual reasons. Being confined, seeing others become ill, and being oneself threatened by the virus, has given the opportunity to many of us to realise what really matters to us: safety and good health, family and friends, the ability to plan a future, to name just a few. These matters all have investment implications.
Second, I agree for financial reasons. This crisis is a real-life example of the huge impact non-financial events can have on financial assets. Someday another virus may be on our doorstep – or climate change could well trigger many events with comparable consequences.
How does one prepare for that from an asset management standpoint?
This crisis shows how now the S in ESG is paramount. As much as the E and the G which may have been the focus in the past, S is now centre frame2. Events have revealed some behaviours favouring short-term financial profit at the cost of social damage, if not health and safety. One investment manager has taken an interesting angle in analysing airlines companies from the S, perspective, rather than the more industry-standard E3. With the economic impact of the pandemic hitting hard, we might have to expect social imbalance and unrest. Even the very existence of the virus might create some imbalance, for example between those who are immunised and those who are not. All of this makes the S an even more important parameter to analyse now when making investment decisions.
This doesn’t however mean the E and the G deserve less attention than before.
Lockdowns have revealed a positive environmental impact around the world – less air pollution, fewer toxic spills, thriving wildlife and the return of birdsongs to our cities, to name but a few. This is all good but doesn’t solve the core problem: we don’t want to fix the E at the cost of an economic downturn, increased unemployment, growing poverty and heightened geopolitical tensions. On the contrary, fixing the E should be a growth driver. The sanitary crisis adds to the already long list of environmental problems to fix. For example, fear of contamination might lead to increased use of individual/private, rather than public transport – exactly the opposite of what many environmental policies aim for. This will also require some skilful thinking to solve.
The G deserves further consideration as well, with a whole set of new questions such as the relationship of a company with its suppliers, how they are selected, in which countries and why, where a company locates its production centres and why, etc, etc. This list of questions will grow longer before it grows shorter.
In everything I have set out above, asset managers have a role to play. And this is a much broader and more noble role than “just” generating good returns. I believe asset managers should embrace this role, make it part of who they are, and clearly express it in their brand.
A solid and well-designed brand brings differentiation, trust, simplification of choice and pricing power4. All attributes which have become even more desirable in a Covid-19 world. Brand is also the expression of the culture of the company and the current crisis offers a real-life example of how a clearly nurtured and expressed culture can be an enabler.
Much emphasis has been put on videoconference tools to explain companies, smooth transition to a “working from home” set up. As useful as they are, these are just tools. I believe culture has an immense impact on the success, or otherwise, of companies to transition effectively to a “working from home” set up.
We are seeing asset managers who have brilliantly navigated the difficult environment of Q1 2020 from an investment standpoint, but who are unable to then leverage this from a client standpoint because they can’t operate efficiently remotely. And this is not down to technology. This is due to a culture which is not acting as an enabler of smooth operations. Conversely, we have seen companies switch their operating mode seamlessly from pre-Covid to “new normal” and have their teams galvanised for success by the challenge.
At the heart of brand lies Purpose 5: why the company is here, why it exists. It is the spiritual core that radiates from within and forms the connective tissue and muscle that shapes and drives the unique culture of the company.
For asset managers, this Purpose must now express the focus on social responsibility. Together with my business partner Markus Kramer, I have created the Responsible Investment Brand Index, RIBITM, which measures the connection between what asset managers do in terms of Responsible Investment and how they project it in their brand . One of the items we evaluate is the expression of a Purpose, its quality and how it connects to societal goals. In the 2019 edition of the index, we found that of the 220 largest European asset managers, only 13% express a Purpose which connects with societal goals. For those who do, and do it well, the internal and external benefits are huge.
Purpose expressed as “Our goal is to help people invest better, retire better” or “To empower people to live a better life” or “We believe investing responsibly enables economic prosperity and social progress”, are even stronger and more inspiring in the light of the recent crisis and the numerous societal challenges which come with it.
So, to paraphrase Peter Drucker, who said: “Profit for a company is like oxygen for a person. If you don’t have enough of it, you’re out of the game. But if you think your life is about breathing, you’re really missing something.” we would say: “Investment performance for an asset manager is like oxygen for a person. If you don’t have enough of it, you’re out of the game.
But if you think your life is about breathing, you’re really missing something.”
And that is especially true at a time when there is a whole world to reinvent.
The asset management industry is under immense pressure. More than generating returns, the public will expect it to fulfil its societal responsibilities. There is an immense opportunity for the asset management industry to be perceived as the enabler of what goes right, rather than the scapegoat of everything that goes wrong.
We are willing to contribute to this movement. As part of this, my company, H-Ideas, has just signed the Principles for Responsible Investment. We are proud to commit ourselves alongside asset managers, asset owners and their service providers to contribute to a more sustainable future.
Should you wish to discuss these topics, please don’t hesitate to contact me.
Jean-François Hirschel is the founder and CEO of H-IDEAS, a company which aims at re-establishing trust in the financial world. His professional expertise lies in strategically positioning financial services companies at brand and product level. Hirschel has held senior leadership positions at Société Générale and Unigestion. He holds a MSc from EPFL Lausanne, Switzerland, and has profound knowledge and experience in Institutional, Private and Retail Banking & Asset Management.
Markus Kramer is a partner at Brand Affairs, a specialist consultancy with expertise in strategic positioning and brand building. He holds an MBA from the University of Oxford and is a visiting Senior Fellow in Strategic Brand Management at Cass Business School London. The portfolio of brands he works with include companies such as Aston Martin, Harley-Davidson and many more. Kramer is author of the book The Guiding Purpose Strategy, A Navigational Code for Brand Growth.
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