Asset managers should take “the moral high ground” to be rewarded by investors, according to a new report from the Long Finance project, established by Z/Yen Group and Gresham College, called Survival of the Fittest: A Swift Survey of Shifts in Asset Management.

Moral issues pertaining to asset management include CSR issues, as well as legal, ethical and discretionary responsibilities. While the moral high ground is an “abstract concept,” the report says, it is evident when asset managers demonstrate certain qualities. For example, they should be able to demonstrate how they measure, define and verify outcomes. Also, measurements such as assets under management, fund performance and asset allocation should be published in a way that stakeholders can understand them.

In other recommendations, the report says the capabilities of people and organisations should be measured by outcomes over the long term, with a view to consistency. This would allow investors to regain trust and confidence in the industry. During this process it is also important for organisations to share what they learn and feed this back into their business.

Ethical investing

Ethical investing has evolved into an approach, rather than a specific technique, and now extends to areas of finance such as current accounts, mortgages and insurance. Choosing ethical financial providers is a growing trend, says the report, that is most marked in the UK, and the Germanic and Scandinavian countries of Europe. The term "ethical" also is slightly nuanced by region, Long Finance points out, with more of a focus on corporate governance in the US, where Europe focuses on "green investment."

In Britain, a report from the non-profit research provider UKSIF shows that assets invested in the country’s ethical retail funds have hit £11.3 billion ($17.7 billion). Over the last decade, the number of “ethical investors” has tripled, from 250,000 in 2001 to three-quarters of a million today, the Long Finance report says.  

“Lack of trust in mainstream banks has led many more people to think about the ethics of their finances. The financial crisis has led to increased awareness of how financial service providers use customer’s money. An increasing number of consumers are considering issues such as trust, responsibility and ethics,” it says.

For asset managers, there is another aspect to this: identifying the companies that will solve problems such as food and water shortages should lead to investment in companies that will see high demand for their products and services in the future.

“International agencies predict that by 2030 the world will need to produce around 50 per cent more food and energy, together with 30 per cent more fresh water, while mitigating and adapting to climate change. Companies that are managing those environmental, social and governance issues well are likely to be the star performers of the future," the UKSIF report says.

Management, operational conduct

Within the asset management firms themselves, the board leadership must demonstrate that it is committed to governance, risk and control, the report says. This includes addressing remuneration, and making sure it is aligned with business strategy and “business reality” – of lower financial expectations in asset management in 2012.

At an operational level, asset managers are increasingly ensuring their individual staff understand their personal responsibility, according to the study. Specifically, the risks to the company need to be understood by employees, and it must be clear who is managing those risks.