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The decade since the 2008 global financial crisis has seen more stringent capital controls, regulation aimed at improving professionalism among financial advisers and outlawing incentives that don’t work towards good client outcomes. Oh, and strong stock market growth.
And yet one fact remains a constant: consumers lack trust in financial services. A recent whitepaper from the Transparency Taskforce attests to this (available for download here) and assesses the reputational damage done by market events such as the dot-com bubble and the credit crunch.
As part of our Retail Customer Interests Study, we recently held focus groups with private investors – both DIY and semi-advised – to understand what ‘trust’ means to them and how it can be earned or eroded in the context of asset management. Investors’ holistic definitions of trust included “confidence in an ongoing partnership”, “feeling safe”, “have my interests at heart as well as their own” and “follow my ethics”. These emotive descriptors were not inspired by trust in asset management specifically, but that doesn’t make them any less valid in that context. People are more inclined to trust industries or brands with which they feel they have a long-term, two-way relationship characterised by dependability and confidence in what’s being offered.
Conversely, lack of transparency, socially unjust or deceptive behaviour, not acknowledging or rewarding customer loyalty and broken promises chip away at trust.
Factors contributing to and corroding trust can easily be applied to the Great Rise and Fall of Woodford. Beloved by investors for his long track record of delivering investment performance and the regular flow of information he provided – including look-through of his entire portfolio and investor Q&A responses – his fall from grace has been sudden and brutal. On Friday, BBC News published an article focused on the human cost of the Woodford Equity Income debacle, aptly titled People who trusted Neil Woodford with their money. The upshot of the article is that investors didn’t realise that the fund could be suspended and as such, feel a sense of injustice. It also suggests a lack of transparency – where were the risk warnings? Should consumers be expected to understand the risks associated with investing in unquoted stocks in an open-ended fund?! Should the fund have been promoted by Hargreaves?
Woodford’s woes certainly don’t do the asset management industry any favours in terms of gaining, or regaining, consumers’ trust. Yet it’s not all doom and gloom. Perhaps it’s simply time for a new breed of investment superhero. If the X-Men franchise can embrace a female lead, can we do away with our dated conception of a star manager?
Going back to our private investors’ definitions of trust, how can the asset management industry appear more dependable and give confidence when there is always the risk that investments don’t pan out? How does it engender that feeling of partnership or alignment with personal ethics?
Responsible investment could go a long way to earning the trust of a wider pool of consumers, as well as rebuilding trust among current investors who’ve lost faith. The story is about investing in the future, engaging to improve things, longer-term returns, and not contributing to harmful practices or industries. Investors can even choose to have a positive impact. The potential relationship between a consumer and an asset manager can be deeper and more multi-faceted if it is not just built on investment return objectives – such a relationship is merely transactional. And if performance is lacking one quarter, the sustainability fund manager still has something to offer the investor in terms of ‘bigger picture’ stuff and reflecting their values and beliefs.
Of course, responsible investment is not philanthropy and in its most basic form, environmental, social and governance (ESG) integration is about protecting performance rather than ‘doing good’. It will also be important to communicate this message to investors. But one shouldn’t ignore the trust that could be earned by reporting to investors that their money has translated to x tonnes of greenhouse gas emissions avoided or x fewer litres of water wasted.
The potential for creative, engaging and compelling communication around responsible investment is actually one of the exciting things about it. WHEB’s Impact Calculator and Rathbones’ recently-published In pursuit of green report are just a couple of examples of information more likely to captivate your average private investor than a piece of commentary on how you’re a high-conviction, bottom-up stock picker (sorry, but it has to be said!).
More fundamentally, the image of an industry in tune with modern realities – the climate emergency, threats to global food stocks, heightened consumer consciousness, the diversity movement – is more likely to be trusted than one dominated by past performance figures, financial jargon and sharp suits.
Earlier this month, World Tour cycling crew Team Sky became Team Ineos and took its new sponsorship for a spin around Yorkshire. Wheel spokes a blur as the cyclists zipped gracefully through the Dales, cheering crowds at en route towns and cities – the three-day Tour de Yorkshire appeared to many spectators a jubilant affair and successful launch event for the rebranded team.
And yet the unveiling of Team Ineos has been mired in controversy. Ineos is a petrochemicals giant, one of the world’s biggest plastic producers and a vocal supporter of hydraulic fracturing (a.k.a. fracking) for shale gas exploration. The on-the-surface incongruousness of the company supporting a cycling team has not been lost on the likes of Greenpeace and Friends of the Earth, who feel sportsmen traversing beautiful landscapes should not bear the logo of a company threatening their very existence. These organisations and others have accused Ineos of ‘greenwashing’, using PR spend to evoke a friendlier brand face while avoiding making real changes to address its environmental impact.
Those who defend the Ineos sponsorship argue that it is the big plastic producers that are best placed to tackle the problem of plastic pollution – they have the power to innovate and drive significant change – and that Ineos is committed to this issue. The company’s sustainability reporting promises emission reductions and greater emphasis on recycled materials, and talks about R&D successes in the field of sustainable materials.
But how does one square this with the fact that the company’s founder and chairman, Jim Ratcliffe, only recently threatened to close its Middlesborough plant unless it could be granted leniency on meeting EU clean air and water regulations? Or the fact that the plant has amassed scores of violations related to emissions and health and safety over the last few years? Not to mention the myriad scuffles with anti-fracking campaigners, organisations and even governments. The Department for Business, Energy and Industrial Strategy’s Public Attitudes Tracker has consistently shown low public support for fracking (12%, compared to 40% opposing in its most recent wave).
It’s not surprising that as the tide of public opinion turns against Ineos, it’s looking at ways to bolster positive brand associations. The company also supports the Daily Mile, a commendable initiative to improve children’s physical and mental wellbeing through regular exercise.
And this strategy is nothing new. For decades, companies promoting unhealthy lifestyles have aligned themselves with sports teams or sporting events. Coca-Cola has supported the Olympics since 1928; McDonald’s only recently ended its four-decades-long sponsorship of the Games. Encouragingly, it seems that these food and beverage behemoths have clocked that affiliations with athleticism no longer suffice in whitewashing the darker side of their societal impact. Coca-Cola bought a majority stake in Innocent Drinks in 2010 and completed a buyout a few years later, adding a healthier, more sustainable brand to its stable. McDonald’s, meanwhile, has spent years working to convince a more discerning consumer base that it has improved the sourcing and quality of its produce, and that it is committed to offering healthy options alongside the usual American fast food staples.
In light of the fast food industry example (see also: the London Mayor’s ban on junk food advertising across the TfL network), should irked cycling fans accept the Ineos sponsorship and treat it is an early, shallow step on an uphill journey towards more profound positive change? Will the company’s greater visibility to the British public actually result in mounting pressure on the brand to take its environmental impact more seriously? Or should big companies with poor environmental records be well and truly publicly chastised, with their financial beneficiaries deserving of difficult questions and criticism too? Should Froome and co. be taking the high road? Whatever your view, no party involved should ignore the fact that the race to curb climate change is on.
Research in Finance’s Responsible Investment Review is out now! While lacking debate on the responsibilities of sporting heroes, it does contain important findings based on 1,500 survey responses, 64 in-depth interviews, fund data analysis and stacks of desk research. The report outlines how investors across the spectrum feel about responsible investment, how governments are pushing the ESG and wider sustainability agenda, and what asset managers should be doing to stay on top of evolving investment preferences and imperatives.
For more information on the Responsible Investment Review or to subscribe, please get in touch.