Whilst the relevance of sustainability to investing is widely accepted by all actors along the investment value chain, its implications on their corporate strategy has yet to be fully appreciated. To illuminate the vast magnitude, profound implications, and requisite agility for leaders in adapting their strategies, we draw parallels from the film industry's transition to colour during the 1940's.
A century after Technicolor’s™ three strip photography revolutionised how the media industry enables us to see the world, sustainability, digitalisation, and decentralisation are structurally changing the way our investments shape it. We view ESG as a “colour lens” through which all investments are perceived, rather than a growing niche bursting onto the mainstream getting bogged down by disclosure regulations.
The foremost challenge for asset management executives lies in determining when business model transformation supersedes reactive short-term adjustments. The growth of their assets, returns, retention, profitability, and resilience hinges upon this critical decision, particularly amidst a sea change in the macro, geopolitical, regulatory, and digital landscapes. We often see the first steps being taken as a reaction to client demand and regulatory compliance. It is unsurprising that the “ESG talent” that emerges has been skewed towards those disciplines rather than the investment professionals entrusted with deploying capital. To bring some clarity to this, we delve into a recent case study we wrote for the PRI Academy to extrapolate how financial returns, real world impacts and the risks of “stranded liabilities” are of more pressing concern than the threat of being labelled as “greenwashing”. The 1940’s were unkind to those studios that could only contend with black and white films.
Most firms may choose to limit themselves to adapting to an ‘outside-in’ approach. This may be just enough to stay in the game by avoiding avoid irrecoverable losses. The “single materiality” approach to integrating ESG is a basic evolution for all investment activity that will leave laggards facing existential business risk. Getting ahead and gaining market share requires a “dual materiality” approach which is nothing short of revolutionary, particularly when it comes to redesigning investment strategies, business models and resource allocations. Most notably thanks to the evolution for how data is used.
These are exciting times for designing new fund launches, GP stakes, seeding, and even fund incubation, particularly considering the distinct transmission mechanisms available within the alternative investments industry. Just as ESG data adds colour to the scrutiny of individual assets, implementing appropriate frameworks into the investment lens of portfolio managers and fund allocators higher up the value chain expedites industry-wide adoption. The key to unlocking this potential lies in answering the pivotal question at the heart of this scrip: "Where does subjectivity truly lie”?