Asset Managers Tout Their ESG Strategies — But Rarely Live Up to Those Standards

Before asset managers can successfully invest in companies according to environmental, social and governance principles, they need to get their own houses in order. But such a cultural reset takes a big investment in time and money, according to a paper released Monday from Willis Towers Watson’s Thinking Ahead Institute. 

“Cultures can change, but it takes time and strong leadership. Weak and poor cultures come about because organizations were misled or misdirected,” said Roger Urwin, global head of investment content at the Thinking Ahead Institute, in an interview. “Organizations can escape from bad culture, but it takes a lot of leadership.” 

Effective ESG investing is strongly connected to culture, said Urwin. Pensions and other institutions will want managers who specialize in investing through an impact or sustainability lens to have real, working examples of these philosophies taking root in their own asset management organizations. 

Urwin expects that asset managers will quickly make bigger cultural changes than they’ve made in decades as a result of the Covid-19 crisis, as well as the global protests about racial inequality that are pushing corporations to make public commitments to diversity and inclusion. Urwin said the new report relies on six years of research by the Thinking Ahead Institute on culture.

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For starters, asset managers can’t change their culture without having a better relationship with asset owners.

“The cultural differences between asset owners and asset managers are most evident in the client-centricity area where asset managers have, over time, been increasingly drawn to more self-centered values in response to commercial pressures,” according to the WTW report. “This paper argues that the future sustainability of the asset management model requires much better trust and alignment between asset owner and asset manager.” 

WTW argues that inclusion and diversity are a huge part of a successful asset management culture, not just because it’s more equitable from society’s perspective. If the goal is to have better ideas, then the staff has to represent multiple perspectives.

“Diversity and inclusion have two valid motivations — to build a fairer and better culture, and to build a stronger and better business model,” the paper said. 

Urwin said it’s still hard to get good data on the number of underrepresented minorities in the industry. Nonetheless, the number of African-Americans, for example, in the asset management industry is small relative to their representation in the overall North American population. That needs to change, he said. 

“We’ve seen more progress now on commitments [by managers] to be more inclusive in their culture, but the structure is weak,” he said. The consulting firm is continually asking for more data from managers and asset owners, but it's slow going, Urwin said. 

“The theory is that diversity matters because diverse groups of people bring more and different ways of seeing problems and, thus, better ways of solving them,” according to the report. “With the complex problems faced in investment organizations, weak diversity (thinking the same) gets stuck in the same place; strong diversity gets through the blockages.”