Resources in the investment value chain have to shift away from financial analysis and securities trading towards stewardship and engagement according to Luba Nikulina, global head of manager research at Willis Towers Watson.
Speaking at the 8th Sustainable Finance Forum run by Oxford University Smith School of Enterprise and the Environment, Nikulina said there were a number of asset managers “doing good things” but there was too much greenwashing as sustainability has “became very fashionable”.
Nikulina and her team of 100 analysts review 30,000 asset management products to come up with 500-700 recommendations.
“There has been a lot of activity as everything related to sustainability is very fashionable. There are some firms that do some good things, but in reality in my team “green washing” is becoming a very frequently used term as we see managers using sustainability as an opportunity to package something for higher fees.”
She said the level and allocation of resources in the investment value chain needed to be reallocated to where it can and should make the difference.
Willis Towers Watson recently conducted some research on large passive managers to assess their capabilities in engagement. Nikulina said the resources they have dedicated to governance and engagement have increased in absolute terms, but in terms of assets under management the resources haven’t increased in line with that.
“The level of skill is also not good enough,” she said.
This is in the context of a speech given at the same conference by Professor John Kay who said that “stewardship is the main function of a large asset manager and we need to encourage them to get more resources to do that”.
Nikulina said that setting the tone at the top of the investment value chain was a powerful move forward and encouraged asset owners to engage more with their stakeholders including companies, managers, and consultants.
“But the problem with this part of the value chain is it is incredibly under-resourced. There are some very passionate asset owner champions promoting the cause, but there are very few of them. It is not the lack of willingness but the lack of resources, experience and expertise. It will come with time but it will take time.”
Feedback that Nikulina’s team have had from companies is that when there is engagement it focuses too much on issues effecting short term financial results, such as executive pay.
“Engagement is missing on longer term topics like strategy, culture and the way businesses are run which are not likely to lead to short term financial impacts but are arguably more important. This leads to the question of how we do engagement and on what,” she said.
Measuring impact of engagement is also an area that needs more work.
Nikulina’s team has been engaging with asset managers on their engagement practices in a bid to help measure their impact.
“Measurement is difficult. It is hard to measure without counterfactual evidence and say would have happened if you didn’t engage. For my team the only way to do sensible measurement is to shift our resources and engage with asset managers, and see what stands behind the success stories and the failures, and engage with them on the action plan,” she says. “The only way to achieve success is to have regular engagement and monitor progress – we now rate managers on that and if we haven’t seen progress then we downgrade the managers’ rating.”
In terms of measurement, Nikulina encouraged those entities that do engagement to carefully measure their progress.
“If you can’t measure yourself how do you know if you are making progress and effectively communicate with your stakeholders,” she said. “In reality for engagement to be successful it has to be done by everyone. We need a shift in mindset.”
