Focus on Capital & Liquidity positions or a significant exit from non-core activities & Markets?

In order to generate improved returns in 2023, some experts are suggesting that asset managers will need to place more emphasis on capital and focus less on profits which may further cement commitments to ESG investing. This may be easier said than done, as making such a shift could prove difficult for many firms. However, those who are able to make the transition may find themselves in a much better position to weather the storm and come out ahead in the long run.

The investment landscape is constantly changing, and so are the strategies for success.

Today, responsible investing is increasingly at the forefront of investors’ minds. They are aware that sustainability factors such as environmental, social, and governance (ESG) can present long-term returns which make responsible investing an attractive prospect. Rising global consciousness is driving responsible investments in commodities, financial institutions, and other equities; a shift that is altering the landscape of conventional investing. It's therefore necessary to formulate strategies that embrace responsible investment decisions while also seeking to maximize returns for shareholders. Interestingly, research into responsible investments tends to point towards a positive correlation with better overall financial performance; signalling a win-win situation for both investors as well as companies who align with responsible principles. Or at least, for those who can straddle those two areas of focus.

The kickback against esg investing

While esg investing has experienced increasing popularity as  investors have become more conscious of the political and social implications of their investments it has also been targeted by shareholder activism made up of those who are critical of esg-related investments. These activists argue that esg investing can lead to unnecessary costs and creates unintended consequences which have led to widespread pushback against esg investing strategies. While esg investors strive to make ethically conscious decisions despite the kickback against it, the long term influence of esg investing does appear to be on an incline.

Shareholder pressure in support of ESG investing

Shareholder activism is a growing area of interest, as investors are more conscious of their money's role in creating a positive impact.  International Film Director Richard Curtis is the driving force behind the Make My Money Matter movement which is driving ordinary people to ask where their money is being invested and when they don't like the answer, demanding 'not in my name'.

From being considered just an irritation, companies and Directors who ignore increased shareholder pressure on ESG investing may face corporate and personal litigation, forcing individuals and corporations to take responsibility for their operations. With ever increasing legal obligations surrounding environmental management, Directors can be held personally liable under civil and criminal law.

It is paramount that companies invest in ESG initiatives within the scope of shareholder interests and shareholder objectives must be taken into serious consideration when drafting corporate policies. The mood music of Regulators has changed from 'we've asked you nicely' to 'now we're telling you!' punitive fines for those who don't pay attention.

But does impact investing really drive sustainability?

In short, yes. Impact investing is a key component of sustainability initiatives, as it combines two objectives that are often at odds: the pursuit of financial return on investments and engagement in projects with social or environmental benefit. Effective Impact investing connects motivated investors with sustainability-driven initiatives so these investors can provide support to organisations who are striving to make positive change through sustainability efforts. The rewards may deliver either tangible or intangible returns, such as securities, dividends, or recognition for helping a worthy cause. In turn, sustainability endeavors receive much needed resources both financial and human capital in order to reach their goals. Because of this symbiotic relationship between sustainability efforts, investors, and sustainability beneficiaries, the impact investing movement is contributing greatly to the cause of global sustainability.

Profitability or sustainability?

Entrenched beliefs suggest it is an either/or choice but data says otherwise. Evidence from credible sources such as S&P, Monringstar and others, confirms that in order to increase their profitability in the next few years, businesses need to focus on building a strong reputation with their customers which will open up new avenues for growth. Additionally, they should recognize where their strengths lie and amplify their stance on responsible investing before its competitors do. Finally, if done effectively, diversifying into new markets can help improve profits over time. Ultimately, by following these simple steps Asset Managers will position themselves – both financially and reputationally – to maximize profits in the long-term.

Reputational risk affecting share price

In 2017, Wells Fargo's share price dropped approximately 11 percent in the weeks after its sham account scandal, resulting from egregious wrongdoing by its leadership. Similarly, United Airlines share prices plummeted around 2.5 percent following video footage of the company ordering four passengers off an airplane to make room for crew members and injuring one of them while removing him from his seat.

Oil & mining incidents stick in Investors minds too and in the case of BP and the Deep Water Horizon oil disaster, it's Chief Executive Tony Hayward made a bad situation terrible!

These cases illustrate how serious reputational damage can have an adverse effect on share price, due mainly to impacted consumer trust in leadership involved in shaping the future path of their respective companies.

Conclusion:

Businesses need to be agile and adaptable to changes in order to stay ahead of the curve. And the curve needs to be more than the shape of a £ or $ symbol and to reflect the wider environment in which their investors live, breath and work.