The Stranded Assets Programme at the University of Oxford’s Smith School of Enterprise and the Environment has undertaken a comprehensive study of the role of investment consultants in green investment. Investment consultants are key ‘gatekeepers’ for asset owners, such as pension funds, and are instrumental in determining whether innovative ideas are accepted or not by the financial community.
Ben Caldecott, Director of the Stranded Assets Programme said, “The expansion of green investment is being held back unnecessarily by inadequate pension fund-investment consultant relationships. One of the many problems is the confusion over whether fiduciary duty allows pension funds to act on climate change or sustainability issues. It does and investment consultants are not pressing as proactively as they should be, which might be seriously harmful.”
“Innovation is also impeded by short-termism. Investment consultants are evaluated according to short-term appraisal cycles. Even when longer-term perspectives are clearly superior, they may be compelled to press for alternatives that perform ‘better’ in the short-term. Pension funds should alter mandates to avoid this."
The report also finds that investment consultants face losing significant reputational and relational capital with their asset owner clients if short-termism is not addressed. Pension funds may find their investment consultants culpable for not having sounded alarms loudly enough when they had opportunity to do so.
Caldecott added, “Investment consultants could face a devaluation of their reputational capital if they fail to help their clients plan for risks that arrive ‘sooner than expected’. This looks increasingly likely with environment-related risks, such as climate change, that are having significant impacts much sooner than previously anticipated."
The authors argue that given the scale of some of the problems identified, it does not seem likely that isolated efforts by single investment consultants will suffice. Collaboration is needed and the report makes a series of recommendations to support this. For example, a collective campaign to correct pervasive misinformation, such as continued misunderstanding about the implications of fiduciary duty for green investment, would be significant.
The study also proposes two new tools to aid both asset owners and investment consultants in bolstering green investment capabilities. The authors have created a comprehensive set of criteria and a new algorithmic tool for asset owners to analyse the competencies of investment consultants on green investment.