IBE calls for asset managers to underpin ESG investing with culture assessment

IBE news
21 March 2022

Tags: Corporate governance, Ethical Values

Global asset managers and major corporations are facing calls today to apply an ethical culture assessment to their Environment Social and Governance (ESG) investment criteria. This apparent gap in the ESG evaluation process is described in the latest research by the Institute of Business Ethics. The paper - Ethics: the missing ‘E’ in ESG investing? - explores the associated challenges facing the investment industry and makes recommendations for both asset managers and companies.

As the war in Ukraine intensifies, and calls for economic boycotts and sanctions against Russia increase, there seems to be an even greater need than ever for investors to actively promote, and exemplify, ethical behaviour by including a measure of culture into their practices and processes. This work by the IBE seeks to provide a way forward for this to be industry-standard practice.

In interviews conducted across a sample of UK asset managers and corporate investors, the IBE sought to understand how the use of ESG as a measure of investment-worthiness is meeting the needs of the financial sector to make sustainable investments.

Most respondents agreed that the ethical culture of the firm is not being considered in the analysis of their ESG credentials but that they struggle to know how best to address this need. They describe burgeoning regulatory requirements for complex data, as well as the pressure to focus on the short-term, to reduce costs, and to work within their own company’s culture. Several identified that the system isn’t working as intended and, as a result, ‘needs a major reboot’.

IBE Director Dr Ian Peters MBE says: “There is a great deal to welcome in the way ESG is profoundly changing the way companies are assessed and analysed. We can already see the benefits as more and more companies use it to support their journey towards a more sustainable future. But it is clear that asset managers need help and guidance if they are to benefit fully from the value ESG gives in their decision-making.

“The answer lies in using existing measures and techniques to assess the ethical culture of companies. We would welcome the opportunity to work with leaders in the financial community to help them embrace these techniques and reap the benefits.”

Key recommendations for asset managers:
  • To ‘quality control’ their ESG measurements asset managers must recognise that they can benefit from analysis of companies’ ethical culture to understand their real priorities and motivations 
  • Asset managers need to develop methodologies to assess culture. Managers who do this can create an opportunity to exploit inefficiencies and harvest a return premium. These methodologies are beginning to develop, even if not yet in widespread use within the industry
  • To be credible, trustworthy and sustainably competitive in ESG, asset management firms should ensure that they have a board-led, organisational response to the ESG agenda that builds a culture that is consistent with their offering. 
Key recommendations for companies:
  • Companies shouldn’t just tick boxes or chase the ESG numbers, but provide a convincing, authentic narrative of what the company is about, reflecting its purpose and values
  • Companies should take advantage of opportunities to give an account of how their values are embedded in their culture and reflected in both important decisions and day-to-day behaviours throughout the organisation
  • Companies should consider how the ethics function can support this agenda, e.g. by providing a dashboard of cultural indicators for the board to monitor or by overseeing the integrity of reported ESG numbers.

Bob Wigley, chair of UK Finance, the body representing the banking and finance industry comments: “ESG measurement is here to stay. If we are to encourage and promote sustainable investment then assessing an organisation’s culture should be a key element of this. I welcome and endorse this timely piece of work from the IBE. It provides a valuable contribution to the ongoing debate about how we make ESG the most effective tool it can be.”

Global investment manager, Ninety One sees the advantages of using a more holistic approach to ESG measurement and sustainable investing and has developed a framework that takes into account a firm’s workplace practices expressed as culture, and interweaving appraisal with broader value creation. 

Stephanie Niven, Global Sustainable Equity Portfolio Manager, Ninety One, said: “In order to incorporate culture into our investment process we had to challenge the norms and innovate. Therefore, we re-examined the definition of ‘culture’ and its empirical backing as a value driver to develop a framework for corporate culture assessment. Building this framework drew on our skills as active fundamental stock pickers, reviewing over 150 different corporate case studies to create a framework that can be applied and provides valuable insight across all sectors and geographies”. 

Dr Ian Peters MBE is available for an interview.

Media contact: Louise Third MBE, Director, Integra Communications Limited
(E) louise@louisethird.com 
(M) +44 (0) 7773 288342
(O) +44 (0) 115 983 1205

Download the paper here...