Investment consultant Towers Watson & Co. wants to transform the way the world's largest institutional investors think about sustainable investing, and they've enlisted the help of Oxford University and money managers to think about tangible ways investors can take a longer-term focus.
Macro factors, such as resource scarcity or environmental degradation, eventually will transform our world, as well as the way we invest. However, the short-term investment tools of today do not appropriately equip investors for the future, said Emma Hunt, London-based senior investment consultant on Towers Watson's sustainable investment team.
“We're trying to shift that question (of whether incorporating environmental, social and governance factors improves financial performance) from the evidence-based one, as that relies on assessment of past data, to a set of questions that clients can ask based on forward-looking trajectories,” Ms. Hunt said. “We don't know the exact answers, but there is a series of scenarios we can present and discuss.”
Towers Watson used to talk to clients about the financial benefits of ESG integration. “But we found that wasn't a particularly helpful process” because for every study that said ESG factors make a difference, there would be one that said it didn't affect returns, she said.
Now the consultant has joined with money managers and academics at Oxford University on Project Telos, a research collaboration due to publish results in March.
“We consider sustainable investing in its broadest setting (as) incorporating ESG but going beyond to consider the large intergenerational issues that institutional funds need to take into account and issues within the financial system itself,” according to a project brief. “We base our analysis purely on financial criteria rather than values-based criteria and progress toward processes and strategies that address the impediments.”
Gordon L. Clark, the Halford Mackinder professor of geography and fellow of St. Peter's College, Oxford University, is leading the effort on the academic side, which will provide the intellectual framework for long-term investing.
“Resource scarcity and climate change provide investors with a long-term perspective with some genuine opportunities for investment over the long term,” Mr. Clark said.
The state of financial markets today challenges investors to look long term, he added, to the structural changes beginning to occur. It's about “going beyond current crises to (focus on) long-term risk factors and long-term investment opportunities,” Mr. Clark said.
For example, in the area of resource scarcity, Mr. Clark said people are too often focused on dwindling oil reserves, or energy scarcity in general. However, research by Dariusz Wojcik, also a fellow at St. Peter's, “suggests that kind of resource scarcity is not nearly as significant as the increasing scarcity of water and arable land,” both of which will attract very high premiums in the future, Mr. Clark said.
Other research focuses on ways fiduciary duty can be seen in terms of long-term commitments, as well as on long-term issues related to corporate governance and climate change.
As investment managers move through this period of significant transformation, Ms. Hunt said their strategies should be free to evolve to address new information, pushing back their investment time horizons from three or five years out to as much as 20 years.
“We are thinking that a number of institutions might want to consider an alternative investment strategy that looks out to the long term and works backwards,” she said. “It can affect all different parts of their investment process,” including governance, benchmarks and fee design structures.
