This article is part of NordSIP Insights – SDGs 2020: 17 Shades Faster. Read or Download the entire publication here.
Worldwide, the role of the financial sector in sustainable development is increasingly emphasized. Long-term investments, including foreign direct investment, play a key role in directing resources to where they are most needed, away from where they are not, and for mobilizing change around the Sustainable Development Goals (SDG).
With public policy and UN-led initiatives such as the Principles for Responsible Investment (PRI) shining a spotlight on this issue, we have seen a partnering of sustainability and financial thinking that moves beyond traditional assumptions about the passive role of private financial institutions in sustainable development agendas, and spotlights the financial sector as an agent of change.
The strengthening of laws and increasing public interest in the sustainability of financial investments, are two of the driving forces behind this changing perception. However, there remains disagreement about the precise role of large financial institutions in specific sustainable development issues, and precisely how to achieve industry-wide change that reflects shifting customer and policy demands.
It is here that the final Sustainability Goal #17: Partnerships for the Goals, plays a significant part in our capabilities as an industry to address the other 16 aims. Partnerships for the Goals is most often focused on creating links between state actors and the private or charity sectors. However, for us, it is also interesting to consider how partnerships within sectors such as the financial industry (between companies, internal departments, and among individuals) help to shape the changes necessary to meet the aims of sustainable development.
For a traditional asset management firm like T. Rowe Price, the emergence of sustainability thinking has opened-up a world of new ways to view the investment landscape. Partnerships, both internal and external to the firm, have in many ways helped to reframe and reshape traditional thinking, and to build a framework for improved transparency and flexibility that better serves client needs.
Within this article, we look at how the sharing of ideas through internal and external partnerships is helping to drive change throughout the company. The creation of a new range of sustainable investment products is a prime example of this.
Partnerships Between Clients and Global Investors Shaping New Product Development
T. Rowe Price has recently registered three new sustainable funds in Sweden – the first funds of this type that the company has launched. This shift in product direction was greatly influenced by the engagement of some of their larger Nordic clients. Henrik Fahlåker, Country Head for Sweden at T. Rowe Price, recently spoke about the firm’s new sustainable funds and the key role that internal advocacy played in their development.
According to Mr Fahlåker, “our proprietary exclusion screen was developed in response to the most common ESG concerns expressed by our clients. The sustainable range of funds, however, were ultimately made possible by the early commitment and support of two key clients, Söderberg & Partners and SPK. Mr Fahlåker goes on to state that the two clients were “onboard right from the start, putting their trust in the T. Rowe Price sustainable proposition.”
According to Patrik Ohlsson, Head of Responsible Investments at Söderberg & Partners Asset Management, his firm has a long-standing relationship with T. Rowe Price. In a statement about the new sustainable funds, and their partnership with T Rowe Price, in helping to create them, he said, “We consider sustainable investments to be a key component of future returns in our funds and we are pushing all our external managers to improve in this area. The dialogue is transparent, and we share our views and how we analyze ESG factors to facilitate mutual progress with our collaborators. We have a long-standing relationship with T. Rowe Price and value their expertise in managing US Equity. As our sustainability work is constantly developing, we expect to see the same from our external managers. With their Sustainable Funds, we believe T. Rowe Price is on the right path and is well aligned with our policy for responsible investments.”
Stefan Ros, Chief Investment Officer at SPK, also highlighted the role of partnership in achieving change, commenting that “Our sustainability policy for investments focuses on risks related to ESG factors. Our main process for enabling this is through dialogue and engagement to influence the external managers to work in the same direction as we do to achieve the highest standard of ESG integration. We were pleased to support T. Rowe Price in launching an SRI variant of its flagship Global Growth Equity Fund, which is largely aligned with our sustainability policy. The new sustainable fund is managed by the same team as the original fund and aligns well with our sustainability policy and our overall approach to ESG.”
Sustainability Teams Driving Change in Investor perspectives
In the two years since joining, Maria Elena Drew, Director of Research, Responsible Investing at T. Rowe Price has focused on fully integrating ESG analysis as part of the investment process. As she described in an interview with us last year, some of the most important projects she and her team were involved in revolved around educating investment managers about how ESG analysis can help their investment process. Today, portfolio managers and analysts at T. Rowe Price are supported by Maria’s specialist ESG team, providing proprietary ESG factor analysis, as well as written research on key ESG topics (both investment specific and thematic), and providing subject matter expertise on specific issues.
Talking about the current COVID 19 crisis, Laurence Taylor, portfolio specialist for the new T. Rowe Price Sustainable Global Growth Equity Fund, believes that the additional perspectives afforded by ESG analysis are ever more important as we deal with the uncertainties of current markets. Mr Taylor states, “societal pressures are constantly forcing managers to integrate and improve ESG dimensions. I can see real potential for the crisis period we are living through to compound these pressures as we eventually return to a new normal. How to interpret (changes in the investment environment) and how to invest on the right side of them, stock by stock, will form an even more crucial part of our job in a post coronavirus world.”
Mr Taylor also sees this as an opportunity for T. Rowe Price. In his view, “clients are looking for help and intelligent observations in a difficult time,” and institutional investors like T. Rowe Price have huge potential to help enrich solutions by playing an active part, and working together with clients, to build well balanced, integrated portfolio solutions.
At T. Rowe Price, analysts and portfolio managers have responsibility for integrating ESG factors into investment decision and therefore it is encouraging to see growing engagement with ESG as a tool for analysis, enriching portfolios with a different way of understanding value and ultimately helping ensure value for the long term.
Partnerships Between Investors and Industry Shaping Change
Participation in collaborative industry initiatives also supports T. Rowe Price’s core engagement program. The firm selectively engages in partnerships that it believes can have the most viable and impactful effect on change.
Often, these initiatives target improved disclosure or business practices on a market-wide level. In 2017, for example, T. Rowe Price joined a coalition of 16 large investors to become a founding member of the Investor Stewardship Group (ISG). ISG was formed to bring investors together to address fundamental issues of governance and investment stewardship in the US, where no market-wide governance code existed.
Similarly, T. Rowe Price was one of 40 organizations and individuals to sign on as original members of the Japan Stewardship Initiative (JSI). Launched in November 2019, the aim is to encourage wide-ranging discussions among asset owners, asset managers, and other interested parties, on issues related to company stewardship – and where the outcomes of those discussions will drive beneficial change for everyone in the industry.
The financial industry has a vitally important role to play in ensuring sustainable development. Indeed, the SDGs include access to financial services among its core targets. However, it is not enough to simply act as a passive provider of capital. Industry participants at all levels must take a more active role in ensuring that the allocation of capital continues to be most efficiently and effectively channeled in the pursuit of sustainable development.
Collaboration and partnership across the industry play a crucial part in this. It is not only macro level partnerships, between industry heavyweights and state actors, or NGOs, that can affect positive change. Partnerships at all levels can achieve similarly positive, smaller scale outcomes. T. Rowe Price’s development of a new range of sustainable funds in close partnership with key clients is one such example.
As an industry, it is crucial that we work together to effectively respond to the growing public appetite for positive change, and to actively participate in fostering long-term sustainable development.
You can read more about ESG at T Rowe Price by clicking through to their ESG Policy Webpage.
Photo by Charles Deluvio on Unsplash