The inability to place green investment into clear investment categories is holding back their growth, as is the continued fixation on short-term investment by consultants, academics at the University of Oxford have alleged.
A working paper by Ben Caldecott, director of the Stranded Assets Programme at the Smith School of Enterprise and Environment, and Stanford University research fellow Dane Rook has argued that both asset owners and investment consultants were to blame for the lack of activity in the green investment market.
But it argued that the way consultants approached their business was causing some of the friction, as fee structures acted as a disincentive to investments that did not result in a near-term return.
“Because [asset owners] may not be keen to pay explicitly and directly for ‘green investment’ services, many [investment consultants] may not be adequately incentivised to develop such capacity, even if it might provide a long-term advantage,” the authors said.
In addition to the misalignment of incentives, an issue examined in the review of UK equity markets chaired by John Kay in 2012, the working paper also said that many trustees remained concerned that consideration of environmental matters was “essentially a breach of fiduciary duty”.
A recent review of fiduciary duties by the UK Law Commission found that environmental, social and governance (ESG) issues were often “ill-defined” and instead suggested that trustees examine specific financial and non-financial matters instead.
Caldecott and Rook also suggested that a lack of standardised terminology was holding back the growth of green investments, and said that the use of different terms by both consultants and asset owners could result in “unnecessary or exaggerated disagreements and misunderstandings”.
“Moreover,” they added, “because many green investment concepts and products do not easily fit under conventional labels (e.g. modern portfolio theory approach to handling risk; asset-class-based allocations) many [asset owners] encounter difficulties in ‘making green investment fit’ within their broader investment aims.”
The authors suggested that growth in the green investment market was being hampered by investment consultants attempting to reconcile mandates from asset owners with strategies that integrated green concerns.
The report therefore suggested that investment consultants be compelled to focus greater attention on long-term matters, or otherwise risk damage to their reputation and relationships with clients.
It concluded: “We anticipate that ICs could face a jolting devaluation of their reputational capital if they fail to help their AO clients plan for and cope with a long-term future that arrives ‘sooner than expected’.”
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