By Luuk Jacobs
By Eva Keogan
By Jonathan Max
By Luuk Jacobs
By Andy Milner
Guest blog by Martin Rich, Co-founder and Executive Director of Future-Fit.
Social responsibility and sustainability have been hot topics for some time now. What was once a trend has become the norm in the world of investment management. You’ve only to read articles in Bloomberg and the Wall Street Journal to find this in evidence for quite some time. But when we look a little deeper, beyond the headlines, how do we all measure up as businesses?
Think about your company.
Ask yourself this: is my company truly sustainable, in everything it does and sells? If not, then how must the company change before it is? And do we simply measure ourselves against others, or what we really believe a sustainable future needs to be?
If you’re struggling to answer these questions, you’re not alone: it’s hard to assess real progress if the destination is unclear. And until now we’ve had no clear, credible and actionable definition of what being a truly sustainable company really means.
Unfortunately the myriad corporate sustainability rating and ranking systems currently in existence don’t hold the answer because they focus on today’s best practice rather than tomorrow’s required practice. To see why this is a problem, let’s take an example.
The Dow-Jones Sustainability Index gathers data from over 3,400 listed companies around the world between 80-120 industry-specific questions focusing on economic, environmental and social factors that are relevant to the companies’ success, but that are under-researched in conventional financial analysis. It currently awards Thai Oil a total sustainability score of around 87%. There is no reason to doubt that this particular oil company is doing more than its peers. But in the face of climate change and a de-carbonised future, the very nature of the oil sector’s current business model is unsustainable. In that context is such a celebration of relative performance warranted? Can we really expect Thai Oil’s CEO and employees to question the carbon-intensive nature of their business if the given sustainable score is 87%?
Yet given the scale and complexity of the problems we face as a species, being less bad than others is just not good enough. Rather than merely focusing on today’s best practice, we must measure the gap between where business is now and where it needs to be.
We need a benchmark grounded in a scientific understanding of how the world works. One that identifies the minimum acceptable level of environmental and social performance every company must attain if society – and thus their business – is to prosper long term. One that defines the breakthrough point beyond which a company starts delivering positive value. One that inspires business leaders and employees – in other words, you – to push for truly innovative solutions which create greater value in a sustainable future.
That’s the purpose of the future-fit® Business Benchmark. A future-fit® business is one that in no way undermines – and ideally increases – the possibility that humans and other life will flourish on Earth forever.
The first benchmark, published in May 2016, comprises a set of 21 future-fit® goals that collectively draw a line in the sand that marks the transition point beyond which a business starts helping – rather than hindering – society’s transition to a sustainable future. Combined with a corresponding set of metrics, the benchmark enables those in the business to set their own targets, prioritise and measure their continued progress.
Ultimately, all companies should be constantly striving to improve their extra-financial business performance. But this must not be simply based on comparison to others, but rather through seeking to achieve tomorrow’s required practice in pursuit of a flourishing future.
Will you be featuring in the future-fit® Business Benchmark for 2017?
By Luuk Jacobs
As the new financial year is upon is, it’s time to look at the year ahead. The pace of change has historically been slow in the financial services sector, but several key themes are emerging. These are gradually reshaping asset management businesses and the way they serve their end clients, while others are more disruptive. Here’s what they are and what you can expect from them this year.
Regulation Asset managers have had to deal with a raft of new regulation in the last few years, and would no doubt welcome a period of stability without yet more changes to the rules this year. We can confidently say this is not going to be the case.
While Brexit will bring uncertainty around passporting, and questions over which aspects of EU legislation such as and questions over which aspects of EU legislation will still apply, rumour and discussion will rumble on throughout the year.
What’s more pressing is MiFID II (due in 2018, before Brexit negotiations are complete) which for asset managers, is both opportunity and burden. According to the FT, complying with the EU’s far-reaching financial reforms will not be cheap or easy. The projected €2.5bn cost of Mifid II has rattled asset managers who will be uniquely affected because they will encounter many regulations for the first time. With the countdown now on, the industry needs to acquaint itself very quickly with MiFID II and gather together the necessary skills and tools to handle it.
This is not the first time the industry has been ‘rattled’. The Retail Distribution Review (RDR) which came in to force under the auspices of the then regulator, the FSA, at the end of 2012, was a game-changer for the industry, and is widely acknowledged to have reshaped financial services for the better. We think MiFID II will eventually be viewed in the same way.
Margins The Asset Management industry is feeling squeezed and in July last year, the FT accused the industry of actively failing. Then came In the November 2016 FCA interim report on its Asset Management Market Study. According to Deloitte, the FCA’s proposed remedies are likely to increase awareness and hence scrutiny of fund charges and investment performance, which may in turn put pressure on margins and accelerate the existing trend towards passive investment strategies. If 2016 was the year of navel gazing and existential angst for Asset Managers, 2017 should be seen as the year of reinvention and innovation.
Pressure on active management charges has been intensified by the wave of smart beta passive products that have hit the marketplace, and a race to the bottom on price between the biggest ETF and index tracker providers. Meanwhile, mediocre returns from hedge fund-type products in recent years have made investors less willing to pay performance fees. Many Asset Managers have been rationalising their product ranges to get rid of small, underperforming funds and focus on their core offerings, as well as trying to reduce their operating costs more generally. But, in future, what they want and need to charge and what clients will accept could continue to diverge.
So where does the industry go now? Top of the list for Asset Managers wanting to increase margins is to use technology as a way to reduce costs specifically in both client relationships and the investment process. According to the KPMG ‘Investing in the future’, “client profiling, data analytics and operational flexibility will be increasingly critical to effectively target and service an increasingly diverse client base”. Additionally, disrupting the existing status quo will create new and exciting opportunities – the newly The Asset Management Exchange which aims of simplify process in a cost efficient way is a perfect example of this.
Digitisation When we think about the move to digital in financial services, we tend to focus on things like online banking and apps or new developments such as bitcoin. With huge investment in technological innovation for the end consumer, from mobile, and apps to fingerprint recognition and Apple Pay, it’s safe to say the adoption of digital has been much slower across the back office with systems integration a big issue along with security and data breach concerns.
Investment in technology boosts capabilities and gives companies access to the tools they need to responds to increasing client demands for better performance and more transparency. The industry has not been first off the block by any stretch of the imagination when it comes to technology adoption but it is playing catch up. EY published the Wealth and Asset Managers Awake to the new Digital Age report in 2015 and while much of what’s outlined inthis still stands, there are new and emerging trends to be aware of in 2017. PwC set its stall by Blockchain late last year but that’s not the only trend to be aware of ‘robo-advisers’ and data visualisation are the big wins for 2017 according to FX-MM magazine. The overall message with digitisation is that it’s now the imperative rather than just the nice to have for companies who want a competitive advantage.
Stewardship and sustainable investing The old adage about choosing between principles and profit is still widely believed, and makes many Asset Managers steer clear of impact investing. But shareholder engagement is back on the agenda. Investors today don’t just want to avoid those companies with questionable environmental and social business practices, they want to support those which aim to bring about positive change. Some Asset Managers, such as Hermes Investment Management, have dedicated stewardship teams which actively engage with the companies in which they invest. But there are ways fund houses can support better business practices without doing the actual engagement themselves. Companies such as FutureFit can play a valuable role here, helping firms incorporate ESG principles into their business models. With young investors in particular becoming more discerning about where they put their money, only the companies which support sustainability will succeed.
Millennials According to Goldman Sachs, millennials are poised to reshape the economy; their unique experiences will change the ways we buy and sell, forcing companies to examine how they do business for decades to come. Millennials have come of age during a time of technological change, globalization and economic disruption giving them a different set of behaviours and experiences than their parents. They’re the first generation of digital natives, their affinity for technology helps shape how they shop and they’re used to instant access to price comparisons, product information and peer reviews.
This has far reaching implications for Asset Managers in the years to come and will be evident in the new generation of employees and customers.
Facebook’s Millennial Survey showed millennials don’t trust big financial firms, and they want their investments to reflect their principles. As well as being the investors of the future, they use new technologies such as mobile banking and embrace crowdfunding.
Millennials will make up around 75% of the workforce by 2025. They will not fit the traditional mould, demanding flexible working practices and a new challenge every couple of years. Another issue is the diversity problem in financial services. There is still low participation of women and minorities, especially in the most senior roles. This will mean the industry has trouble attracting young people who will want to see the diversity they are used to reflected in the company they work for. To draw and retain the best talent, Asset Management will need a shake-up – a tough ask for a conservative sector with a deeply ingrained culture.
To attract a millennials as a customer base, Asset Management will need to harness the power of fintech which is proving a much more attractive proposition for this tech-savvy generation. To attract millennials as employees, our advice is to take note of trailblazing campaigns such as Aviva’s which threatens to cut ties with companies without active diversity policies and challenge existing norms.
Busy times are ahead for Asset Management and with new regulation and trends coming in 2018, we expect a whole new tranche of trends to write about next year.