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“Responsible” alternative investing with AIMA

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The phrase “responsible investment” justifiably raises an eyebrow in the alternative investment world. The prospect of receiving a poor ESG rating by Moody’s or S&P presents less of a threat in the private-client sphere than for publicly-listed investors.

But even if Blackrock’s advisory role in the EU’s new ESG policy looks a bit like “the fox guarding the henhouse”, the industry seems to be increasingly recognising the benefits of jumping in on the act before it’s pushed. The $8tn-worth of alternate funds under management – including in infrastructure and real estate – present opportunities in renewables and social utilities which are commanding more public attention.

But is this all a realistic concern for alternate investment managers? Adam Jacobs-Dean, Global Head of Markets, Governance and Innovation at the Alternative Investment Management Association (AIMA), spoke to #DisruptionBanking about how far the network’s 200 global members are convinced:

What are the main challenges to upholding ESG in the alternative investment sector?

“Where pressure arises, it’s usually from investors themselves, and they’re increasingly interested to know what their managers are doing in terms of ESG integration. So that’s the starting point of the conversation.

“But at the same time, managers are expected to deliver returns and that’s often reflected in the way the investment community has looked at ESG historically. For example, screening out particular sectors for investment has been seen as problematic, because, if you say you won’t be investing in high-emitting sectors, you’re reducing your investment universe and therefore your potential for return.

“The approach today is much more focused around risk management – ensuring that investments are not detrimental to returns. Most investors simply see ESG criteria as risks to be addressed.

Do your members expect levels of exposure in, say, high-carbon-footprint investments to significantly change going forward?

“It’s worth saying that investment managers haven’t historically tended to market their products as “green” products. Even today, very few would have products explicitly designed to be environmentally impactful, for example. The core of what investors are offering is uncorrelated returns and portfolio diversification.

“So no, you’re unlikely to see a concerted change in what our industry is investing in.

“What we are seeing is firms being more aware of the risks of what they’re investing in, including non-financial risks, which are increasingly featuring in investment strategies.

“Certainly, members are also aware of a changing regulatory framework which is becoming more demanding in terms of sustainability. The Sustainable Finance Action Plan, which the European Commission has delivered, includes tougher requirements around risk management, ensuring that there is senior manager responsibility for sustainability concerns. It’s making disclosures more demanding as well.

“For most firms, however, it will be an evolution more than a fundamental departure from what’s gone before.

What are your members’ main concerns for future regulation?

“The one to watch is the Sustainable Finance Action Plan. One proposal [of the plan] will require firms to disclose sustainability risks alongside their risk management processes and formalise the expectation on firms to do something about sustainability risks.

“There’s also the mandate to disclose more fully around specific products and funds involved in sustainability goals, to check that firms aren’t “green-washing”.

“The Action Plan itself was subject to public consultation, so we have engaged with that at every step to ensure our members’ views are understood. What we don’t want is a scenario where the regulation implies that the products firms are offering are in some way “green” based on the way they are described in regulatory terms, when that was never designed as a core objective in terms of how the product was designed. People usually think of green-washing as managers themselves wanting to present a product as “green” when it’s not, but regulation can also play a role if it’s too broad in its reach. So the proper labelling of investment products is important.

“Regulation also needs to consider limitations around data. One of the things managers struggle with is that they may not have access to all the data from the Issuers whose securities they buy and sell, because these firms don’t necessarily disclose the information needed to fulfil ESG criteria. Information can also be very difficult to compare due to the use of different metrics, which is especially true for comparison across regions. These are concerns our members are raising.

Public investors are used to facing more scrutiny from ratings agencies and the financial media about responsible governance. Is it fair to say that alternative investment institutions are not facing the same scrutiny?

“It’s a heavily regulated sector, including in terms of obligations about reporting. So focus on governance is not new to our members and how they run their businesses.

“Increased scrutiny can also come from investors themselves. There is an increased interest in the community toward diversity and inclusion, managing environmental footprints, both in terms of the company itself and their investment portfolios. So while, often by nature of their size, alternative investment managers are less exposed to the public pressure around environmental and social practices, they still answer to their investors.

“The same is true of gender participation. There are some institutional investors who will make gender representation part of their investment criteria, and who will engage in discussion with funds and use it as a differentiating factor.

“Obviously, our members don’t have shareholders so you don’t get the same pressure that a publicly-listed company would. The big drive must come from investors.

“Many of our members are small firms, perhaps of 10 people, making commitment to ESG targets more costly. There’s also a recognition that in gender terms the industry does have to be more representative.

Does AIMA play any role in regulating or otherwise encouraging ESG in the industry?

“No, but there are various commercial providers which offer ratings for investment managers, and they approach it in different ways.

“One way is to simply look at the positions the manager has in their portfolio, while others look more holistically at the practices of the company itself – how does it engage with the investments and securities that it holds? What is it doing to ensure a diverse workforce itself?

“But it’s not something we do. If you’re an AIMA member, you’re not bound by any specific standards. What we do offer is guidance and educational material with respect to ESG, and provide options for our members to pursue.”

The boom in alternate investing since 2008 has excited activists with the promise of private-capital-driven institutional and social change. The regulatory landscape is beginning to align too – see Morningstar’s recent acquisition of Sustainalytics, designed to empower “all types of investors to drive long-term, meaningful outcomes that contribute to a more just and sustainable global economy.”

The markets are as yet undecided, however, whether the rhetoric of “responsible investment” should be met with equal levels of reform. In a survey published last month, the lobbying analyst InfluenceMap suggested that only 5% of financial interest groups support the EU’s social governance reforms. Blackrock, for all its CEO’s recent talk, was not one of them.

That said, the boost in ESG-friendly funds does seem to be client-driven, according to FTAdviser. Firms of different sizes will have to strike their own balance between sure-fire financial returns and long-term sustainability, whether or not they buy the whole thing.

Author: Oliver Rhodes

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