Mais Callan is the founder of Impactive Associates, a new London-based consultancy that helps investment management firms to lay the foundations for effective and credible responsible investment and ESG integration. She has over 12 years’ experience in responsible investment, which includes leading the ESG integration and research programme at one of the UK’s leading asset management firms, Hermes Investment Management. She has advised some of the world’s most prominent pension funds on stewardship and represented them in board-level engagements with listed corporations in Europe. She also worked with policy makers to develop and promote best practice in sustainability and responsible investment. Here, Mais speaks to Alex Keetch about the prominence and future of the ESG agenda, and the origins and purpose of her business.
AK: Mais, thank you for joining me for this conversation. Could you start by explaining what responsible investment is, and why it is such a prominent topic?
MC: Responsible or sustainable investment and ESG integration are terms that are used to describe the conscious effort of factoring in environmental, social/ethical and corporate governance (ESG) considerations in the selection and management of investments. It reflects the acknowledgement that these ESG factors can have a material impact on investment performance both from a stock-specific and portfolio level in the long term. Put simply, if investors put their money into companies that are badly run and that consistently fail to manage their impact on the wider society and the environment, they risk exposing themselves to higher performance risk and volatility.
There are various strategies that investment managers might use to identify and mitigate such risks, depending on their style and priorities. For example, on one end of the spectrum, managers with strong ethical convictions may choose to exclude whole industries such as weapons manufacturing and tobacco for moral or financial reasons. On the other end of the spectrum, there are “impact investors”, who focus on investing in companies that create positive social outcomes whilst still making strong returns. In between these, many other strategies exist, such as “positive screening”, whereby “best-in-class” companies within industries are selected based on how well they are managing ESG risks and opportunities in relation to their peers. Let’s take fossil fuels for example – oil companies. An investor may choose to a) either exclude the whole oil sector or; b) pick an oil company that does a better job of managing its environmental and social risks relative to those that have a bad track record in these activities or; c) invest in an oil company that does not do well on these issues but makes commitments to improve its practices and engages with investors on a regular basis. All this decision-making requires investment firms to have clearly defined policies and processes for ESG integration, which is where we come in.
AK: Has this always had such a prominent position in mainstream investing practice, or is this more of a recent development?
MC: Twelve years ago, when I first started working in responsible investment, it was still a niche area and in-house ESG specialists were often seen as auxiliary to the core investment function. The relevance or materiality of these “soft” factors was not yet commonly understood. However, over the next few years, the mindset started to evolve, particularly when the financial crisis hit in 2008 and big questions were being asked about governance structures within the financial sector. Also, notable academic and industry-led research started emerging, showing strong links between companies with robust ESG credentials and improved returns over the long term. It became harder to ignore and institutional investors globally came together to promote responsible investment as the right approach for a prosperous and sustainable financial system. Now, responsible investment is evolving from being a “quirk” to a more mainstream element of the investment process along the investment chain.
AK: Can the development of the responsible investing movement be traced back to an individual or company, or a particular fund manager?
MC: Although responsible investing sounds like a new phenomenon, religious institutions have been practicing socially responsible investing ideals for centuries. As far back ack as the 1700’s, the Quakers prohibited participants from investing in the slave trade or war. And one of the founders of Methodism, John Wesley, introduced some of the basic principles of social investing, such as avoiding industries that were deemed unethical or harmful to society (alcohol, tobacco and chemical products). In the 1970s, ethical investing in the US started as a direct opposition to the Vietnam war and in the 1980s in the UK, ethical funds were initiated, such as the Friends Provident Stewardship range, supporting those companies making positive contributions to society. Since then, there has been an explosion of ESG-focussed funds that have been catalysed by the emergence of more research, investor networks and frameworks such as the UN-backed Principles for Responsible Investment and regulatory developments such as the 1995 Pensions Act that requires pension funds to disclose their position on responsible investment. Furthermore, in 2010, the UK was also the first country to introduce the Stewardship Code, which aims to promote a higher quality of engagement between companies and shareholders. At present, 14 countries globally have launched their own codes, including Japan and Malaysia, and the trend is set to continue.
AK: How do you see the investment industry evolving and how important is responsible investment in that context?
MC: I believe that this is such an important time of change and opportunity for the investment industry. It would prove very difficult for investment firms to ignore the societal and technological changes that we are seeing coming through. A huge intergenerational wealth transfer has started, and it is important to understand the different financial management priorities of the newer generation and to adapt business models to respond to this. Millennials care more about where their products come from and where their money is being invested. According to a recent Morgan Stanley study, Millennial investors are twice as likely to invest in companies or funds that contribute towards positive social or environmental outcomes. They favour highly customised, ethical, transparent and technologically-driven solutions. I believe that the investment firms that are agile enough to embrace these opportunities will be best positioned for success. As for responsible investment, given that it is becoming part of the normal language of investing, I don’t see that there is any going back now.
AK: What has the uptake been like? Do you see ESG as being a growth area in which asset managers will invest in future?
MC: The uptake has been significant. According to the 2016 Global Sustainable Investment Review, responsible investment strategies account for about half of all investments in Europe. Globally, it is almost 30%. I do think the trend is likely to continue. However, for ESG to add value from a long-term performance standpoint, it is important to ensure a high quality of ESG analysis and a seamless integration process. The discipline is highly nuanced and still lacks sufficient standardisation, therefore firms need to invest in ensuring their talent has the confidence and right tools for assessing the materiality of ESG issues. Above all else, a clear alignment of understanding of responsible investment within a firm’s investment beliefs, strategy and culture are key.
AK: Possibly difficult to analyse but what are the returns like? Have there been many studies on the success of responsible investing versus an unconstrained portfolio?
MC: Firstly, it is important to point out that it is possible to invest responsibly without constraining a portfolio. Many mainstream funds do so successfully. In terms of returns, there is a large body of evidence that suggests that the upside to responsible investing outweighs the downsides. One of the largest studies led by Deutsche Asset Management and the University of Hamburg examined ESG issues and corporate financial performance across over 2000 academic studies published since 1970 and found that there is a positive correlation between the two. Only 10% of the studies showed a negative correlation. In a 2015 study, Morgan Stanley found that “investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments. This is on both an absolute and a risk-adjusted basis, across asset classes and over time”. Of the investment firms that have been running ESG strategies, a State Street survey found that the vast majority (84%) of respondents were satisfied with the financial performance.
AK: Perhaps a silly question but do some investment firms wilfully ignore the ESG agenda so as to appeal to a certain type of investor?
MC: I genuinely believe that most investment managers are integrating ESG without realising it. It is a language issue more than anything else. When a manager is typically assessing the quality of a company’s management, its operational efficiency or changing consumer behaviours, they are looking at ESG issues. It’s just that they are not using the terminology or frameworks that would help to articulate it as such. There are those who prefer to stay clear of ESG for fear of having to sacrifice performance or because it is perceived to be costly to implement. I believe that with more research, better data and innovative products and services, such barriers will be easy to overcome.
AK: What are UK and EU regulators’ attitudes to ESG at present? Are they supportive?
MC: Absolutely – their support of the ESG agenda in investing is linked to one of the key tenets of financial regulation – promoting healthy markets. The UK Pensions Regulator said in 2016 that retirement plans should take environmental, social and governance factors into account in investment portfolios to mitigate their exposure to long-term financial risks such as climate change. The ESG discussion has progressed significantly at EU level through the launch of a major initiative considering the incorporation of ESG in the fiduciary duties of all EU asset managers. This could be a game changer.
AK: What role can technology play in supporting the management of ESG factors? Is it a particularly ‘disruption-prone’ space at present?
MC: Technology can play a significant role. A lot of effort has been made by policymakers and companies to improve the quality of ESG data and its disclosure. Many ESG research and ratings firms have been established to help investors make sense of vast amounts of information using technology. However, there is still a bit of work to do to ensure data integrity and standardisation and organisations such as SASB are making great strides in leading this. This is still a relatively new space and I am excited by the potential for more innovation in the financial industry as a whole.
AK: What should investment firms do to stay relevant to their customers and the outside world in light of the ESG agenda?
MC: They have a number of priorities, to my mind. Embrace transformational change – don’t stand still. Develop frameworks that will allow you to better understand the impact of your capital allocation on society. Think strategically – not just quick fixes. Focus on meeting client end goals, and help your clients sleep well at night. Foster the right culture to attract and retain new talent.
AK: Are you a natural entrepreneur?
MC: Good question. The instinct and desire has always been there. I am naturally a creative person and have lots of ideas all the time – the challenge is harnessing and executing them. I believe that there is a difference between being entrepreneurial and going away and setting up a business. No textbook or Ted Talk can fully prepare you for the reality. It is a steep learning curve and a white-knuckle ride at times, but I am lucky to be surrounded by highly talented colleagues and supportive family and friends who make it an enjoyable and worthwhile experience.
AK: What made you think of launching your own business at this time?
MC: A combination of factors. I saw a major opportunity, in that I felt a big change in the air and given the huge uptake in ESG across the investment chain, this would be the right time to offer help and support to investment firms that want to do it well. London is buzzing with start-ups and affords an amazing level of support for new businesses. There is so much innovation and I wanted to be right in the middle of it. I have met so many amazing aspiring leaders along the way and am so heartened by the genuine desire to help each other grow, learn and succeed. Finally, I was in search of balance: giving as much importance to family, friends, and personal development, alongside my work. I don’t think you can truly feel fulfilled unless you are happy in both the personal and professional aspects of life.
AK: What are your aspirations for the firm?
MC: Firstly, I would like our clients to see tangible value creation, higher quality brand value, and better connectivity with their customers and stakeholders. Secondly, I want us to be a great place to work, with happy employees who can be themselves, develop personally and professionally and feel fulfilled by the work they are doing. I believe that only when you have passionate employees will that translate into genuinely positive results for clients. As a business, you are only as good as the feedback you get from your clients and employees.
AK: Are you getting any support or funding from government-backed small business initiatives or similar?
MC: What we have benefited from is a huge amount of support, information, and tools to help set up and structure the business. We’ve so far been able to grow organically through revenue, but as we develop further we will explore our options.
AK: Who have been your personal inspirations over the years?
MC: My parents for their strength and determination in the face of many challenges, and for the opportunity they gave my two brothers and me to grow up all over the world and absorb new cultures and broaden our horizons.
AK: What advice would you give to someone looking to start a career in ESG?
MC: Firstly, great choice! You’ll be joining a fantastic, evolving discipline and there is strong demand for professionals in the space. Think holistically though – learn about investment and not just ESG in isolation. And network energetically. I found that people want to help each other in this discipline, but they need to see a genuine desire and commitment, so get involved with industry bodies, attend events, make yourself a part of the conversation.