Mainstreaming Responsible Investment - AccountAbility

An Investment Management Perspective
alterations to behaviour in “reporting” upon the nature of longterm
social and environmental policies of the companies they
analyse, and their potential impact to future financial returns.
There is no doubt this will require greater disclosure on the
part of corporations, most likely catalysed by regulatory
scrutiny if not intervention; in addition, it will require closer
inspection and possible re-organization of business models
and incentive structures of research providers.
Investment Experience
Another practical impediment to mainstreaming responsible
investment has to do with the level of experience and depth of
talent within fund management organizations. With the
exception of firms organized around intensive proprietary
research efforts and performance oriented cultures, the vast
majority of fund management companies tend to recruit
relatively inexperienced professionals as research analysts.
Analysts in such positions typically rely heavily on sell-side
information and analysis during their first few years of
employment, which of course further bolsters the extent to
which short-term information drives investment
recommendations and decision-making at the average fund
management complex. Furthermore, the typical career path in
such organizations is that successful research analysts are
promoted to become fund managers, and successful fund
managers are promoted to become business leaders. The
result is that research analysts who have spent years honing
their analytical skills and industry knowledge — and are
therefore at peak levels of preparedness to perform truly
differentiating investment research on companies’ long-term
business models — are removed from specialist roles and
placed into more generalist fund management positions,
where there is less scope to apply those skills and knowledge.
Similarly, successful fund managers are typically laden with
increasing responsibility for business and administrative
functions over time, which impairs their ability to manage
portfolios in meaningfully differentiated ways. Stated differently,
this situation compels them to rely on less seasoned
investment professionals for buy and sell recommendations on
securities in their portfolios. On the other hand, given the
uncertain nature and magnitude of the impact from
companies’ long-term social and environmental policies (on
their business models and eventual financial performance), it is
clear that only investment professionals with sufficient length
of experience and depth of industry knowledge would be
capable of effectively assimilating this information into concrete
investment conclusions that could be expected to outperform
consensus points of view. This divergence between career
paths at typical fund management companies and the
investment skill-set that is a pre-requisite for successful longterm
investing is an impediment to mainstreaming responsible
investment.
The Path Ahead
It was clear from the roundtables that the intellectual
underpinnings of responsible investment appeal to both fund
managers and their clients. The theory goes that fund
managers would benefit from clearer understanding of
companies’ long-term policies and prospects by making
better investment decisions, while clients would reap the
rewards through higher returns on their capital over the longterm.
Given the fundamental alignment of interests, therefore,
the path ahead must begin with basic fiduciary principles:
what is in the clients’ best interests should drive evolution in
the fund management industry, with public policy support
when needed.
A few of these evolutionary processes are already underway.
The combination of slowing economic activity and reduced
expectations of financial asset performance has forced market
participants to re-think their investment policies. Widely held
pre-conceptions about asset allocation policy and use of
benchmarks are being questioned, with much creative thought
directed toward alternative methods of meeting clients’ needs
through portfolio engineering. The current heady pace of
change in this area, if sustained, is likely to lead the fund
management industry in a new direction over the next few
years (just as asset allocation research ushered in a new wave
in the mid-80s), one that appears at this juncture to encourage
managers away from “herding” around their benchmarks. It is
too early to tell how this type of shift in the industry’s attitudes
towards investing will impact investors’ time horizons, though
it is logical and indeed probable that their time horizons will at
least stop shrinking. Frankly, many fund managers will resist
this type of change. However, the good news is that the
industry at its core is a performance-driven culture, which is
likely to embrace the shift away from “benchmarking.”
An area where some progress is being made, albeit
episodically, is in the extent of due diligence that is performed
on fund managers outside of investment performance
analysis. This includes the thorough review and assessment of
whether or not a fund management company’s depth of
resources, level of investment experience and organizational
structure is conducive to creating and sustaining a culture that
can reasonably be expected to generate superior investment
performance for clients over the long term. While regulatory
pressure for greater disclosure on compensation practices is
likely to help — assuming those pressures are not extended to
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