Responsible leadership has become central to the success of companies in every sector, including wealth management. Not only does it affect the value and reputation of a company, but it goes further to impact staff retention and client loyalty.
Just a few years ago, ethical, social and corporate governance (ESG) – or responsible – investing very much focused on sustainability issues; and more specifically on the environment. ESG investors demanded that companies cut waste and reduce their carbon footprint. And many have.
But the lens through which investors view responsible corporate leadership has been expanding. Today’s ESG investors are increasingly focusing on ethics and governance, taking into account a company’s policies on diversity and remuneration, its impact on local and regional communities, and even its purpose. Companies that don’t match up are ditched or avoided.
Other stakeholder groups, such as staff, communities, governments, regulators and independent third parties, are also weighing in on corporate leadership, looking for evidence of responsibility across a similarly wide range of factors. Any absence of it is seen as a risk.
This means that wealth managers (WMs) are now not only under pressure to provide suitable and trusted ESG investments for their clients but also to live up to ESG values and demonstrate responsible leadership principles themselves.
The need for responsible leadership
Last year, the international rating agency Moody’s reviewed $78 trillion worth of debt and calculated that $8 trillion of it was exposed to what it calls “social risks” – such as income inequality, poor access to essential services, violence and crime. This is interesting because Moody’s inclusion of social risks in its assessment of a company could have an effect on that company’s rating, which affects the cost and access to capital and therefore profitability and growth. This, in turn, affects valuations.
Various governments and regulators are also promoting responsible leadership. The European Union (EU), for example, has been working on regulations and frameworks, included under MiFID II, designed to help investors access reliable, comparable information to help them in their decision-making. The aim is to funnel investment more effectively towards companies that are genuinely sustainable. This, the EU believes, would help it meet its commitments to both the United Nations’ Sustainable Development Goals and the Paris Agreement to keep global warming to a maximum of 1.5°C. Companies able to demonstrate compliance are expected to maintain the widest access to investment; failing to do so could restrict that access. Non-compliance is also likely to lead to fines and reputational damage, all of which undermine value.
The power of employees and customers
Employees, too, are playing an increasingly important role in advocating responsible leadership – and exposing the lack of it. Companies working in areas with skill shortages, such as leading technology players with their need for data scientists and top-level software engineers, are particularly vulnerable to this kind of pressure. But every employer should safeguard its reputation or face the risk of finding it harder to retain and recruit the best talent, again affecting innovation, growth and value.
Another group exercising real power are customers, who vote with their wallets. While they want to buy from responsible companies, they are increasingly keen to invest in responsible management. And they’re getting more organized. BankFWD, for example, was set up earlier this year by fifth-generation Rockefellers as a network for like-minded individuals and organizations that want to use their collective wealth and power to persuade big banks to phase out the financing of fossil fuels.
ESG in action
So what does all this mean for WMs? Of course, they should be able to identify investments that fit their clients’ ESG criteria. They should use new technology to match those clients with the best investments. And they should also embed sustainability into their own core corporate values. This means having policies on diversity, equality and fair remuneration. And just like other industries, they need to be able to prove their credentials.
The stakes are already high and rising further. The latest Accenture – Orbium Wealth Management C-Level Survey revealed that, on average, 32% of wealth was expected to leave WM’s over the next five years as it is handed down the generations. Reasons cited include younger generations seeking comprehensive ethical investments and advice, as well as wanting advisers whose values chime with their own. This survey was undertaken before the global pandemic struck and the expectation and initial feedback from WM’s today is that this trend has accelerated as clients look to use their power to make a positive difference.
This should be a wake-up call for many in the industry, yet according to our survey only 41% of WMs believe they will have embedded sustainability as a core corporate value within their strategy and governance by 2025. In other words, even if they can talk the sustainable talk and identify responsible investments, the majority won’t be walking the walk. This might cost them clients, just as it does in other industries.
The reality is that today WMs, just as much as players in other sectors, need to be able to show those interested in responsible investing that they share their values and that by working together they can have the biggest possible impact. Not only will the investment be responsible, but the facilitator will need to be too.