I spent much of the first part of my career (at Jupiter Asset Management) trying to understand and explain the prejudice against sustainable investing – not only amongst investors and financial advisors but also amongst my portfolio manager colleagues.
As context, our sustainable equity funds largely outperformed their peers. (For this, credit was due to Simon Baker, Emma Howard Boyd and Charles Millar rather than to me. I take credit for some excellent photocopying and some reasonable tea-making.)
“You’ll never make it to CIO…”
However, there appeared to be an assumption amongst colleagues that “you’ll never make it to CIO if you side-track your career with a focus on sustainable investment funds.” It seemed no more sophisticated than the argument that “organic apples are a bit spotty and recycled paper clogs up the printer”.
Particularly as observed reality proved the opposite: The young portfolio managers who chose the sustainable investment path took more responsibility, sooner for bigger funds and had more client contact than their ‘mainstream’ peers. Their focus on sustainable investment gave them a massive step up rather than a step back.
So, it was with great pleasure last year that I noted how two friends and former colleagues have recently been appointed CIO at their respective firms.
- Neil Brown joined GIB Asset Management as Head of Equities (in Nov 2020)
- Charlie Thomas was appointed CIO of Edentree IM (in June 2021)
Congratulations to both of them and to the organisations that have captured their long-honed skills. They challenged conventional ‘wisdom’ and have proved wrong the sceptics and naysayers of twenty years ago.
However, as sustainable investors, it is our job to look forward rather than backwards – particularly as the assertion has now reversed:
- FROM: You’ll never make CIO if you focus on sustainability
- TO: You’ll never make CIO if you don’t understand and know how to incorporate sustainability
What makes a sustainable CIO?
So, to help the CIOs of the future chart their path to leadership, I’ve set out a prioritised list of the characteristics that I would look for at an asset management firm to determine whether a CIO is really committed to sustainable development or whether they have simply climbed aboard a compliance bandwagon.
In order of priority, for me a sustainable CIO will:
- Strategy: Articulate clearly how sustainability factors should contribute to the investment strategies deployed by their firm (Note: most self-declared ‘ESG asset managers’ fail at this step. There is nothing more depressing than seeing a fundamental active portfolio manager using passive or quants-based investing techniques when it comes to sustainability)
- Transition: Understand sustainable development as a process of industrial and social transition towards a roughly articulated but yet-to-be finessed future. (Warning sign: Any suggestion that ‘ESG’ is an end in itself (or even a thing) typically indicates a limited compliance-orientated mindset.)
- People: Hire or train people such that they understand the concept of sustainable transition, the role of capital within this and the techniques that enable an asset manager to put these into practice (Note: At sita-training.com we believe there is a massive gap in support here)
- Resources: Provide their team with appropriate and sufficient resources to enable them to apply sustainability factors to investment decision-making (Note: This includes data, ratings and RESEARCH. If you’re not supplying your team with budget for all of these (many asset managers stop at data and ratings), then you are simply not enabling them to do their job.
- Process: Ensure that sustainability factors are explicitly considered highlighted within all investment decision-making processes (whether these be stock notes, sector papers, morning meetings, corporate access opportunities. (Note: There will come a time when such factors become second nature and can blend seamlessly back into an integrated process. We are not there yet.)
- Risk and portfolio analytics: Ensure that risks arising from sustainability factors are incorporated within risk and exposure reviews of portfolios with a view to informing clients and portfolio managers of sustainability exposures within portfolios (Note: Post-trade ESG analytics can be an important component of the investment process but are not a substitute for pre-trade research. It would be crazy to drive a car using only the rear-view mirror (you need a windscreen) but it would also be unwise to drive a car without one).
- Ownership: Appreciate the responsibilities that ownership (of a company’s share brings) and exercise these appropriately
- Visibility: Understand how ‘show me’ is more convincing than ‘tell me’ and encourage all participants in the investment decision-making process (including financial analysts, portfolio managers and sustainability specialists) to explain to clients, prospective clients and wider stakeholders how sustainability factors influence capital allocation
- Leadership: Pa! I can’t really be doing with ‘leadership’. Theoretically, I know that it is important for senior people within firms to express their support for sustainable investment. Practically, however, I have now read so many professions of support for sustainability emerge from CIOs and CEOs that, perhaps controversially, I now read “ESG is in our DNA” as “my communications manager told me to say that ESG is in our DNA”. Financiers tend to be analytical first and emotional second. They are more likely to be convinced by a well-reasoned argument around sustainable valuation than they are to be swayed by a worthy speech. Now, if a CIO were to list the sustainable investment funds that they had put all of their own personal wealth into …
- Other: Of course, CIOs (like all senior managers within investment firms) need to be conscious of a wide range of other priorities such as regulatory requirements, client expectations, brand, reporting etc. However, it’s unlikely that the CIO will lead on these. Typically, these other considerations should be ‘owned’ by others in the business. Hence 10th.
What’s your ranking order?
I’ve listed the characteristics that I look for in a sustainable CIO in priority order above. Controversially – perhaps – I have put Leadership at the bottom, Ownership at 7th and Risk at 6th. Do you agree? Would you rank them differently? Why?