We are increasingly seeing social issues catapulted into the spotlight of the asset management community. The recent publication of the final report on the EU Social Taxonomy, launch of the G7 Impact Taskforce (ITF), and the highly oversubscribed issuance of EU-SURE bonds are providing compelling evidence that “socially-oriented investing” capabilities could be a key differentiator to capturing the next wave of ESG capital flows.
Adapting product offerings and expanding mindsets to capitalise on the commercial advantages of social investing, however, will be challenging. In this article, we explore five areas of focus asset managers will need to successfully address to differentiate themselves through their social investing capabilities.
1) Differentiation and Growth Through Mainstreaming Social Investing Rather Than Specialisation
Whilst impact investing is an important part of the industry, it remains a relatively niche area in terms of total capital allocation and is likely to remain an important part of a specialist product range. “Socially-oriented” investing, by contrast. presents an opportunity to highlight and embed capital appreciation strategies through the achievement of social outcomes within mainstream investment processes. Managers successful at integrating credible social overlays across a large portion of their AUM stand to differentiate their ESG credentials in the market and position their funds for further growth.
2) Attributing Investment Outcomes to Social Factors
Whilst methodologies are now largely established for incorporating climate into the investment process (such as carbon footprinting), the picture is more complex when targeting social outcomes and there is no one size fits all approach. There are, however, some sensible steps which can be taken to reach a leading methodology.
First, asset managers must clearly define which of the many potential social issues will be assessed throughout the investment process. Considering the three perspectives of: 1) immediate labour force and supply chain workers; 2) customer basis and use of product/service; and 3) enabling capabilities of the investment to create social impact, is critical to how you define the social impact you want to achieve. Next, KPIs should be selected, striking the right balance between setting targets for the outcomes you want to achieve (rather than just the easy to measure outcomes) and avoiding excessive expense from a laborious process. Data collection processes must be considered when defining this methodology, and asset managers should expect to use this data to consistently enhance their process, as well as to measure outcomes.
A successful methodology should be simple to understand, intuitive, scalable and cost effective to implement. Getting this right is both a pre-requisite and an opportunity for asset managers looking to carve out a proposition in this space.
3) Establishing Foundations for Data
Many asset managers are currently working to build data platforms for ESG, ensuring the right foundations are in place to compete and lead in responsible investment. With social metrics and topics on the responsible investment agenda set to widen, even if you are still a distance away from defining a methodology and associated data sources to measure social outcomes, it is crucial to build scalability and adaptability into your data platform now. This will ensure that you are able to accommodate future data feeds to perform attribution and data analysis, model scenarios and report on outcomes.
4) Responding to Incoming Regulation
With the publication of the final report on the EU Social Taxonomy earlier this year, it is likely the incoming Social Taxonomy will represent significant work for the asset management industry.
Whilst this may be reason alone to start thinking more about the ‘S’ in ESG, there could also be opportunities presented by the taxonomy. Given the complexities to date in defining and measuring social outcomes, the structure provided by the Social Taxonomy across ‘decent’ work, adequate living standards and wellbeing, and inclusive and sustainable communities could represent a competitive, credible framework for early adopters able to align their investments to the taxonomy.
5) Considering Social Issues as Part of Climate
The market has yet to fully appreciate the second and third order impacts of climate, including the importance of transition risk and adaptation. If we consider climate change to be inevitable to a certain degree, then consideration of social factors related to climate change must become a vital part of any climate related investment strategy.
Demographic and migratory movements, as well as economic adjustments stemming from regional depletion of natural resources resulting in displaced livelihoods, are key examples of the interconnected nature of climate and social issues – demonstrating a more comprehensive approach to climate investing will benefit an asset manager’s reputation and credibility.
What Does This Mean for Asset Managers?
There is both risk and opportunity as responsible investment expands and evolves, and social oriented investing will bring both. Social impact resonates at a human level that can both open access to new capital and direct it to places that will help asset managers demonstrate their commitment to investing responsibly. Those asset managers who demonstrate proficiency, experience and meaningful social and financial returns are likely to benefit most in reputation, credibility, and financial success.