Investment consultants are so easy to blame. But on ESG matters, they are now doing some very important work – perhaps a result of prodding in earlier years. Now it’s time to reward consultants for faster progress and help them become the powerful facilitator for sustainable investing that they could be, and also help their leaders deal with the immunity to change that they face.
Such an ESG benchmarking system taps into the essential nature of consultants as well meaning individuals who seek to do the right thing for their clients. It also builds on two major ESG-related changes that deserve praise – thought-leadership and changes to core consulting processes.
Many consultants are producing ESG research papers but the best work today is coming from Towers Watson (their Telos project and The Wrong Kind of Snow). And Mercer has pushed ahead on practical implications – its manager research process now includes an ESG assessment that is provided to all asset owners.
These steps are very encouraging. Yet there is a long way to go, as Ceres has shown in a hard-hitting critique of (US) investment consultancy practice. A benchmarking system could help correct this by creating real business benefits for more joined-up thinking and action.
At Towers Watson, for example, the good work could usefully be more integrated. And more co-ordinated approaches between consultancies would also help greatly. Today, Towers Watson focuses on sustainability and thought leadership while Mercer focuses on responsibility and integration into manager research. But clients need both sustainable and responsible investment, and they need thought leadership and change to be a core activity.
But the biggest challenge is to better connect mainstream consultants and their newer ESG colleagues. All too often, one hears of influential consultants who are negative on ESG, even though their house view is allegedly positive.
We can expect arguments against such a benchmarking system.
The claim that consultants can’t do more because ESG is a client choice is a well-disguised blame game. Just because lemming standards have become legally acceptable, this does not excuse consultants from shared responsibility for fiduciary mismanagement.
Yet others think that the best option is to shrink the role for consultants: the Kay Review largely ignored consultants, along with sell-side and credit rating agencies. While a less disintermediated investment system is obviously preferable, it’s not going to happen tomorrow, so all the current players must be reformed.
And some may say that consultants will prevent such a system emerging, even if it’s needed. But consultants are more principled and wiser than this. They know that end beneficiaries have been treated badly by a very dysfunctional investment system. While no one consultancy, let alone any individual consultant, can change this, the need for system change is clear. So it would be a very brave firm that tried to stop a systemic response.
The sort of things that consultants could be benchmarked on include quality of in-house ESG expertise and evidence that consultants are proactive on ESG-related matters that are within their sphere of control, such as trustee education on stewardship, survey design, manager research, thought leadership and fiduciary management.
The benchmarking process will need to be sophisticated. It is, for example, uncertain which is the best option – a specialist ESG team or a potent change agent who can deliver ESG incentives for all key departments. And it will also be important to secure primary funding for this project from independent sources.
Consultants aren’t solely responsible for today’s dysfunctional, investment system. But equally, it would be very wrong to ignore how consultants could be a much bigger part of the solution.
Raj Thamotheram is an independent strategic adviser, co-founder of PreventableSurprises.com and president of the Network for Sustainable Financial Markets