A letter to the top 100 heads of ESG at global asset managers
A fictional letter from eminent scientists, former CEOs, and former world leaders to the chief responsibility officers/heads of ESG of the world’s 100 largest asset managers
As you know, things are unravelling faster than many of us feared would happen – economically, socially, environmentally and, now, politically. This creates the potential for disruptive change. We note, for example, the spurt of activity to consolidate sustainability reporting standards. This is very welcome. But it’s also rather overdue and there is no more time to waste.
We are pleased to see all key players showing interest. The world cannot do what is needed without the engagement of regulators, companies, auditors, investors and civil society. Each sector has a critical role to play. The corollary is that each should also recognise the critical contributions of other sectors.
Why are we writing to you? You are able to act as an agent of change regardless of whether or not this is in your formal remit. If you are a member of your firm’s senior management team, or otherwise exercise particular influence, you have an extra opportunity – and responsibility – to create the momentum that will move the herd.
We ask you to persuade your executives to take the following actions. The first two points relate to all institutional investors, while the third is relevant to asset owners.
1. From long, horizon and well-diversified investors – index and large investment managers – to all ESG data, rating and analytical organisations
We applaud your persistence in keeping the sustainability candle burning when many companies, investors and even governments showed little interest. We also applaud the September 2020 Statement of Intent of five standard-setting organisations and support you in prioritising active collaboration to develop a standardised sustainability reporting regime by the end of 2021.
We warmly commend the honest technical broker role of the Impact Measurement Project, but there is no substitute for clear top-down leadership commitment which puts the overall system change goal ahead of organisational priorities.
We fully understand your need to cater to other investors – those who have a shareholder value orientation (ESG alpha) or an ethical screening approach.
We do, however, expect your framework to also be fit for our needs. As long-horizon universal owners, our priority is beta stewardship. We expect the ESG reporting ecosystem to provide harmonised protocols and procedures for assessing social and environmental externalities linked to each industrial sector.
Being able to differentiate between leaders, laggards and mid-range movers on key systemic risks is also critical to our mission. We note that none of the reporting standards or the various alignment efforts calls for assessing corporate performance in the context of such real-world, systems-level limits.
Creating resilient portfolio value requires investee companies to create enterprise value in ways that foster – and do not destroy – the health of systems upon which all enterprise depends. We recognise that your priorities today reflect, in part, the lack of clearly expressed client demand and for this we take responsibility. This will change going forward.
2. From all investors, both UN PRI members and others, who espouse good governance to governments
We are fully ready to support you in implementing an enforcement mechanism to deal with two challenges that regulators must engage with:
● Minimum mandatory reporting standards: there are no requirements for reporting from private-owned companies which may have a huge social and environmental footprint. We urge you to take independent unilateral actions to break this Cold War-like impasse in international sustainability reporting;
● Thresholds and allocations: only by assessing the degree to which corporate performance operates within the safe and just space delineated by ecological, social, and economic thresholds can a truly sustainable economy and society emerge. Hence, we warmly endorse the proposal for a Global Thresholds and Allocation Council, which can help enable a formal inter-governmental response when the political context allows. We fully understand that not all planetary boundaries can be dealt with in this manner today, but we urge you to start immediately where there is reliable quantifiable data (GHG emissions, living wages, gender diversity on boards) and build out from here.
3. Asset owners in support of sustainable finance to current and potential investment managers and investment consultants with the following message about short-termism
We have joined, along with other asset owners, the SDI Asset Owner Platform. It promotes a global standard on investing into the UN Sustainable Development Goals (SDGs) which is aligned with the needs of long-horizon asset owners and its focus is on the core business of the investee company, not ESG performance.
This project is AI-enabled and we expect it to help us better understand the real world impact of the portfolios managed on our behalf and so better steer the engagement with companies and regulators alike.
We expect you to propose within the next 12 months how you will change your investment activity to reflect our long horizon and universal ownership investment beliefs. We are fully open to a genuine partnership approach, not least on how to phase in this radical, multi-year transformation. We understand if these investment beliefs do not match with yours and, reluctantly, we will find new managers.
Given the urgency of the climate crisis and the critical nature of the next five years, we expect our managers to actively consider (on a comply or explain basis) divesting from laggard companies in high-impact sectors unless companies publish and then report against net zero transformation plans.
We are looking for forceful stewardship activity across the whole portfolio, with a particular focus on high-impact sectors. We expect innovative solutions and much greater collaboration than has happened to date.
We consider the time for a bottom-up, company-by-company and behind-closed-doors ‘constructive engagement’ approach to climate-related systemic risk to have long passed. If this is not consistent with your beliefs, please inform us.
In conclusion, a critical mass of investors needs to act but there is little time to waste. Hence, co-ordinated independent action is the best solution. The process also should be fully international but ‘laggard’ markets like the US must not be allowed to sabotage or hold up progress. Equally, ‘leader’ markets like Europe must not let geopolitics or ego get in the way of creating a process that is truly inclusive, laying to rest the counterproductive competition across ESG disclosure standards and methods.
European investors have a particularly pivotal role here given the leadership that European regulators have shown and it is important that market players from other regions are brought on board as quickly as possible, not least because this will encourage their governments to join.
European investors should act as if the long-term well-being of Europe’s economy, environment and people are at stake. Because, indeed, they are.
Raj Thamotheram, senior adviser to Preventable Surprises, and Priya Bala-Miller, founder and CEO, Palmyra Partners
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