In a recent commentary titled “Active Investing 2.0” and published[1] in Pensions & Investments on November 28th, George Serafeim and Gabriel Karageorgiou argue that active management has a future, but it will belong to those who best channel three forces:
- Integration of ESG data
- Utilization of technological advancement
- Transparency and representation of beneficiaries’ preferences
Integration of material ESG information and alignment with investors’ preferences and values are of course two pillars of sustainable investing. Technological advancement, especially in the use of large amounts of structured and unstructured data, is playing a growing role as well. That trend was in evidence at our 2016 CFA Boston Sustainable Investing seminar, where George Serafeim presented his most recent work and Andreas Feiner, a founding partner of Gabriel’s firm, Arabesque Asset Management, discussed his firm’s use of unstructured data.[2]
With sustainable investing in mind, I would suggest a fourth force – the value of a true fiduciary. When professionals and institutions with whom we are entrusting our future well-being place our interests first, they are true fiduciaries. We value that kind of trust in many spheres of our lives, not just investing – think of physicians, caregivers and even friends.
When that trust isn’t present, we feel more comfortable turning responsibility over to passive, “lower cost” actors partly because we believe that they are both neutral and predictable. They may not be working for us, but at least they’re not working against us. Many investors, clearly not feeling that trust in our industry, are taking that opportunity now that it is available to them.
The CFA Institute has put its weight behind re-establishing those bonds of trust between financial professionals and the investors CFA charterholders serve with its Future of Finance initiative.
Investment managers that embrace the (re-)development of that relationship of fiducary trust will also find that making the case for the incorporation of ESG information, demonstrating an understanding of beneficiaries preferences and even embracing technology and data – as Gabriel and George recommend – will be that much more successful.