Asset managers and asset owners around the globe are having difficulty with what it means to be a sustainable investor.  This report states that increased consideration of sustainability within investing will help create investment efficiency (maximising returns after allowance for risk) with the long-term strategies that focus on stronger investment focus for the present as well as the future. Many individuals, as well as companies, struggle to realise what sustainability is and how to invest sustainably. Ultimately, sustainability is meeting the needs of the present without compromising the future.

In this report, sustainable investing is considered in its broadest sense, incorporating environmental, social and governance (ESG) but going beyond to consider the large inter-generational issues that asset owners and managers need to take into account.

The definition of sustainable investing integrates three concepts long-term investing, investment efficiency, inter-generational soundness to support equitable returns for each generation of stakeholder after allowing for risk.

The transformational change to sustainable investment comes from the institutional approach to investment. In today’s world, change is not unusual, change happens every day to ensure a better future for the coming generations. It is the same for investments.

There are six broad areas that impact the change while interconnecting with one another. These areas are economic imbalances, adverse demography, degradation of natural capital, innovation and technology, business nexus, and the role of government.

Asset managers and owners must combine the disciplines of finance and investment, governance and the legal framework of funds, and the science of resource scarcity and climate change to assess the financial implications of these areas for investors.

This research provides investors with a Sustainability Roadmap that is a multi-year plan, recognising that the steps that asset owners need to take are not straightforward.

The roadmap has seven main attributes:

• An achievable plan that meets the needs of all stakeholders.
• Starting position.
• Target destination.
• A plan for how to get from the start to the destination.
• What ‘tools’ will be needed.
• How to adapt to events along the way.
• Milestones, ways for stakeholders to measure progress.

It shows the steps that could be taken by an institutional fund wishing to consider sustainable investing.
With three key stages for an asset owner to follow:

• Establish the strategic principles: mission, values, beliefs.
• Ensure appropriate enablers are available: governance, culture.
• Evolve investment policies: drivers, mandates, managers

The solutions and processes proposed integrate incumbent processes. The potential solutions need to be applied to investors particular circumstances.

This paper has been undertaken by Towers Watson and Oxford University. The research of Oxford University was supported by 22 industry partners, and Towers Watson drew on eight of their prominent investment thinkers. It has relevance for asset allocation, risk factor allocation and mandate allocation.

1. Coping with significant change will place strains on the governance of asset owners. These strains arise primarily from the long-term nature of the change and the associated uncertainty. The largest mindset change for investors and institutions involves adapting to a different time horizon (short term versus long term), risk and uncertainty, and the impact of externalities.
2. The sustainable model is based on principles which seek a broader mission, deeper thinking on investment, and a longer-term framework for evaluating success. This approach incorporates opportunities in the traditional areas of asset allocation and manager selection. It would also include consideration of extra-financial factors and ESG issues as these are elements of risk and reward.
3. A dual-goal sustainable investment mission is even broader, seeking to achieve certain extra-financial goals balanced with financial targets. Investment strategy, in this case, may include more specific mandates with a direct connection to sustainability themes.
4. Sustainable investment missions include: preserve fund’s reputation/satisfy beneficiaries’ requirements; consider the responsibilities associated with company ownership and especially externalities; ensuring that investments do no harm; supports giving attention to ESG factors because of the associated reputational risks; and create value by exploiting a long time horizon of the fund and avoiding the inefficiencies of short-term behaviours.
5. Some examples of sustainability beliefs include: externalities tend to be underpriced, suggesting that biases to certain companies with ESG-favourable drivers should outperform in the long term; under circumstances of transformative change, long-term investing can generate return premia relative to short-term investing; and longer-term risks of climate change and resource scarcity can be offset by investment tilts/themes.
6. This report describes a roadmap with investment strategies it demonstrates steps that could be taken by an institutional fund wishing to consider sustainable investing. The process underlying each step would depend on the current position of a particular fund.
7. Some features of sustainable asset management include; committed to delivering long-term value for clients and stakeholders; strong client-centric ethos, aligning interests; partner relationships with clients; and culture committed to investment and service excellence.
8. The investment industry is currently performance-driven, with short-term behaviour leading to markets being prone to bubbles and crises. A minority of investors are driven by extra-financial objectives, providing them with a purpose that is also concerned with societal effects. We believe that sustainable investing retains financial performance as its main driver, but that the outcome is beneficial to society.