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    AM’s Sustainability Key Factor for Asset Owners Says ESG Pioneer

    Stockholm (NordSIP) – Despite the popularity of sustainable investments, the multitude of available approaches to responsible investing can leave market participants confused. In this spirit, NordSIP reached out to Colin Melvin, an industry veteran and the founder and Managing Director at Arkadiko Partners, to hear about his latest project, his sustainable journey and his views on what it means to invest sustainably.

    “As a strategy consultant, Arkadiko’s job is to help investors transform and evolve the model that sits at the core of the investment firm so that all their investment processes address sustainability concerns and opportunities,” Melvin tells NordSIP.

    The consultancy firm is named after the Bronze Age Arkadiko bridge near the modern road from Tiryns to Epidauros on the Peloponnese, Greece, the oldest preserved bridge in Europe. “We like the idea of bridging from unsustainable to sustainable and a new way of doing business,” Melvin says.

    The Sustainable Investment Veteran

    Melvin’s career has spanned over two decades in some of the organisations that are pillars of today’s sustainable finance institutional infrastructure. “For most of my career I have been involved in sustainability or governance in some way.”

    Following 6 years as Corporate Governance Manager at Standard Life in the late 1990s, and two years in a similar capacity at Baillie Gifford, Melvin spent over 14 years at Hermes Investment Management where he set up the firm’s stewardship as CEO and then Chairman of Hermes EOS.

    “The British Telecom (BT) Pension Scheme, which was the owner of Hermes, became concerned its investment managers were not focusing on the longer-term success of its investee companies, and instead were concerned with buying and selling shares, based on short-term financial data or rebalancing passive portfolios. Active ownership and stewardship were absent, a problem which was shared by other asset owners. As a response, we enabled several pension funds to pool their resources by setting up Hermes EOS to fill that gap. Asset managers were able to continue to buy and sell shares, but EOS took on the task of stewardship, acting and engaging with companies on behalf of the asset owners.”

    From 2005 to 2006, Melvin was a core contributor to the drafting of the UN Principles for Responsible Investment (UN PRI), and as Chairman of its Investor Group, steered the initiative to a successful launch in April 2006. “I was part of the drafting group both on the asset owners side and on the asset managers side. In that capacity I was also one of the originators of the term ESG.” Melvin returned to the UN PRI as Director and Chair of the Finance, Audit and Risk Committee, between 2013 and 2016.

    Inventing “ESG”

    As the first Chairman of the UN PRI, Melvin can claim to be one of the inventors of the term ESG. “ESG was meant to incorporate everything that might impact the value of our investments that was not currently being considered. We were looking for some way to describe this by the end of the PRI drafting process. There were about ten of us in the room casting around for ideas. We came up with ‘Environment’, ‘Social’ and ‘Governance’ as a short-hand for this. Of course, the moment we coined the term, it gained a life of its own and became attached to particular projects. There is nothing wrong with that, but it ultimately appears to have grown into something other that what was intended.

    The idea was to change the way that investment happened by incorporating a broader set of information that is material to the decision. However, it has been taken up in many places as a separate activity, with people doing ‘investment’ and also ‘responsible investing’. Surely the two should be the same thing.”

    Setting up Shop

    Melvin set up Arkadiko in 2017, a year after leaving Hermes EOS to help investors shift towards sustainable growth and to fuel more sustainability in the broader economy. “I stepped down in 2016 from Hermes EOS because although having a stewardship service allows asset owners to work together, I could see that there was a problem with the asset managers, and an opportunity to assist” Melvin explains.

    “They were not integrating stewardship and sustainability into their investments, they seemed stuck and lacked an understanding of the changes in their industry,  while simultaneously facing a lot of pressure from their clients. I saw that my experience could perhaps help with that. It seemed that assisting the firms whose job it is to allocate capital to the economy would be beneficial to them and to the companies and markets that they invest in,” Melvin adds.

    Taking Responsibility as an Owner

    According to Melvin, sustainable investing can be divided into two parts. “On the one hand, there’s a need to incorporate sustainability or ESG into the investment process. The other part is ownership or stewardship of the asset and the investors’ behaviours as an owner. It is not necessary to be an activist investor but there’s a quality and opportunity in ownership that investors should value,” Melvin argues.

    “Arkadiko’s approach considers sustainability holistically rather than dualistically. Sustainable investment is often treated as something separate from the general investment process,” Melvin says, echoing his concerns about the wider approach to ESG. “We believe that this is wrong. Investors should not be trying to attach sustainability as an add-on to an existing process. They should seek to adapt and evolve their investment process in its entirety to integrate sustainable consideration,” he adds.

    According to him, this work needs to be supported helping the investment management firms articulate a positive purpose for their investments. “This is not the same thing as a mission. It’s not what they do. It’s why they do what they do,” he explains

    Over the last four and a half years, Arkadiko has accumulated thirty clients, two thirds of which are asset management firms. The other ten are asset owners, including the Japanese pension fund, one of the largest pension funds in the world.

    Transformation Challenges

    According to Melvin, there are two main challenges facing Arkadiko. “Some investors can be quite traditional or dogmatic in their approach. We can work with resistance or reluctance from people who, for a very good reason, are protecting a world view or a model of the world that has been successful for them for a long time. So they might often think that sustainability is part of the noise that they have been successful at screening out of their business. When you come across someone senior or influential within an investment management organisation with that mind-set, then we can  help them see the world in another way. Shifting mindsets and perspectives to reframe the task of investment in the context of sustainability, is a core part of our work. My background as an investor provides credibility with this type of client,” Melvin explains. “We help people take ownership of change and participate in the development of a new model for the evolution of their existing investment process. We help them to transform their processes so that they are fit for purpose,” he continues.

    The second challenge emerges from the need to apply sustainability and stewardship to different asset classes and investment styles. “Integration of sustainability and ESG looks different depending on what you invest in and how you invest, which is also true for stewardship. However, there are too many one-size-fits-all approaches out there. We produce solutions specific to our clients’ needs. Although this may be relatively straightforward when we assist a single asset class boutique, the process becomes more complex once we are dealing with a large multi-affiliate organisation,” Melvin argues.

    Dominant Themes

    According to Melvin the pandemic has shown how interdependent we are. “There’s a deeper understanding of how much we need each other. A transactional mind-set for investing where we see the purchase and sale of financial securities in and of itself as the source of wealth creation, is clearly no longer sufficient. Sustainable investing is about the creation of long-term wealth which has to mean the same as well-being. Our clients understand this and come to see themselves as part of the system, rather than apart from it. This leads to a different set of behaviours, particularly with regard to the quality of the relationships they have with their clients,” he explains.

    According to a survey of asset owners conducted by Arkadiko, the sustainability of an asset manager as an entity is now an important consideration in the decision to hire them. “In addition to finding the right products, asset owners want to partner with asset managers and build long term relationships. So the asset managers’ own sustainability, purpose and culture come into focus. For many years asset managers thought that what they did themselves as a firm was unimportant, so long as they produced the investment performance. Diversity and the quality of working conditions of their staff now matter,” Melvin says.

    “In terms of current themes, everyone is looking at carbon risk and SFDR. There’s a lot of interest in stewardship across Europe because of the new stewardship codes that are in development. Our clients are also considering diversity, both in terms of their investments but also in terms of their own internal processes,” Melvin concludes.

     

    Image courtesy of Arkadiko / SnapwireSnaps on Pixabay / Edited by NordSIP
    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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