Guest interview: Systemic change and the role of asset managers

In responding to requests from new and existing clients, we have noticed an increased level of interest in the work we do to shape the rules and norms governing the financial sector’s contribution to sustainability. We interviewed representatives from three leading institutions to understand why there is growing interest in this area and what is expected of asset managers.

Interviewees

Charlotte O’Leary - CEO, Pensions for Purpose

Emma Hunt - Head of Responsible Investment HSBC Bank Pensions Trust (UK) Limited

Sean Gilbert - Chief Investor Officer, Global Impact Investing Network (GIIN)

What is ‘systemic change’ and why is it important?

‘Systemic change is really about how you fix a problem by trying to understand root causes rather than symptoms’. This view, expressed by Sean Gilbert at the Global Impact Investing Network (GIIN), was also endorsed by our other interviewees. There was also consensus that the ‘economic system has not kept up with social and environmental change’ as Emma Hunt from the HSBC Pension Fund put it. This is fuelling interest in what asset managers and other financial actors can contribute to systemic change. The current economic system does not fully capture wider social and environmental risk. Nor arguably does it prioritise the best long-term investments from an opportunity perspective. Risks that are not captured adequately in the financial system ultimately reappear when they reach breaking point, creating shocks that can undermine the system. As Charlotte O’Leary from Pensions for Purpose (P4P) argued: ‘The fact that insurers no longer
cover flood risk for certain parts of Florida (for example), does not mean that this risk has disappeared. It is just being borne by other parts of society.’

Systemic change is often interpreted as being about changing the ‘rules of the game’. How important is public policy and are there other areas that are important?

All the interviewees agreed that influencing public policy is a key element in systemic change, but they saw its role quite differently. For some, regulation is important in ‘raising the floor by forcing change among laggards’. For others, public policy is the starting point for driving change. It may also be that regulation is appropriate for some issues and other types of changes are better for others. For example, one interviewee suggested that regulation is an unhelpful tool in changing cultural norms (for example in attitudes to diversity) but that it has proved to be critical in incentivising action on climate change. Emma (HSBC) quoted Roger Urwin, the cofounder of the Thinking Ahead Institute, in arguing that ‘while measurement gives a subject respect, it is narrative that gives it meaning’. To really change a system, you need to change the culture of the people that populate it.

But there are other important influences shaping the financial system. Accounting frameworks that ultimately determine what gets valued was one. Ensuring clearer accountability was another. ‘Lawyers are now saying that delivering against the TCFD framework is a director responsibility and creates contingent liabilities on companies’, said Charlotte (P4P). ‘It is a rather laborious route to take because the measurement is driving the accountability [rather than the other way around].’

‘Another powerful driver of change is FOMO (fear of missing out) – in fact the most powerful thing in human behaviour’, argued Charlotte. If you can build a successful business and develop best practice, then other people will want to emulate that.

But is there a legitimacy question in financial actors seeking to change behaviour in this way?

The term ‘systemic change’ was seen as unhelpful – even politicised – particularly in the US. But ‘if you step away from the labels’, as Sean (GIIN) put it, all rational actors have a legitimate interest in the long-term health of society and the planet. ‘Nobody wants lead in their drinking water or to be locked into a job with no protections’, he said. But our interviewees did see different roles for different actors. Sean
pointed out that private market impact investors have typically focused on the significance of new capital in creating impact. ‘With public market actors now thinking about impact, there is much more of a focus on other levers you can influence’, he said.

Asset owners have a clear interest, not least as ‘universal owners’ of the market as a whole, ‘but still need to bring their own stakeholders with them’, argued Emma (HSBC). For asset managers the picture is more complex. Some interviewees wondered ‘whose views do [asset managers] represent?’ as they are ‘just intermediaries’. Others considered their legitimacy to stem from their knowledge of the companies
that they own, combined with their role as agents for asset owners.

What are the other barriers preventing asset managers and others from engaging in efforts to change the financial system?

There is often a lack of a clear business case for work on systemic change. ‘Most asset managers do not have the bandwidth to undertake work on systemic change’, said Emma at HSBC. ‘WHEB is one of the first managers to reach out to us on this question’, she said. There is often a view at asset managers that there are just two jobs: managing assets and gathering assets. Anything else gets squeezed out. ‘Clients are often unwilling to pay for this activity. It is seen as a cost and is harder to sustain with pricing pressure’, said one of the interviewees.

The language also gets in the way as do concerns about intellectual property. This was a particular concern of Charlotte’s. ‘We need to make ways to share data and insights more freely [such as on new tools for measuring and reporting on biodiversity impact] in order to accelerate learning across the system,’ she said.

The biggest barrier, mentioned by all three interviewees's short-term investment horizons. Short termism is seen as a key element in divorcing the economic system from the social and environmental systems on which it is based. It is also seen as a barrier preventing financial actors from addressing systemic change. ‘You can’t deal with systemic issues within the context of a short-term mind-set’, argued
Emma. Sean suggested that short-term attitudes at asset managers are a significant problem. Asset owners tend to think long-term because their liabilities stretch out over the long-term. ‘Companies are also much more inclined to longtermism because they are wedded to products, brands and infrastructure that is not liquid.’


So what are the solutions and what is the role for asset managers like WHEB?

While the lack of a business case may be seen as a barrier, both Charlotte and Emma agreed that work on systemic change should be seen as an investment. Charlotte argued that ‘asset managers need to devote resources to thinking longer-term and mapping out where the opportunity will be. You can create change that leads to opportunity’, she said.

All three interviewees also stressed the importance of purpose and identity. ‘If you don’t know who you are as an organisation, or you are just a marketing company, you will be pulled around at the whim of politics’, said Emma. ‘But if you have a clear purpose, you will attract high-quality clients that stay with you for a long time because they buy into your identity and what you offer.’

There was also a strongly held view that asset managers (and indeed all businesses) should listen to and focus more on addressing the needs of all of their stakeholders and not just their shareholders. ‘Asset managers have not been in ‘receivemode’ nearly enough’, was one view.

It was also thought that asset managers should also look to get involved in collaborative initiatives aimed at addressing systemic issues.¹ Because while some of these issues are difficult to address as an individual asset manager, collaborations can help amplify asset managers’ voice and are an efficient way of channelling influence.

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¹ For example groups like the Institutional Investors Group on Climate Change, Pensions for Purpose and the Asset Owner Council were all mentioned. But it was clearly recognised that other financial actors have critical roles to play. ‘We are seeing asset owners recognise that they have to project their voice more’, was one view. Investment consultants too were seen as a key ‘pinch point’ in the investment value chain who could play an important amplification role for asset owners, for example by assessing asset managers on their engagement with systemic issues.