With a strategic priority to raise awareness and support the growth of the responsible investing market in Scotland the Ethical Finance Hub (EFH), in partnership with the University of St Andrews Centre for Responsible Banking & Finance and veteran fund selector Jon ‘JB’ Beckett, has launched a research report to help define and measure the responsible investing market in Scotland.
The full report presents the findings from our qualitative and quantitative analysis of responsible investment in Scotland. It assesses the approaches and terminology used by Scottish asset managers involved in responsible investing and also identifies the size and composition of the Scottish responsible investing market in relation to the remainder of the UK (rUK) and Ireland.
In terms of taxonomy, primarily using PRI signatories as the qualifying criteria, the report finds that 95% of the 19 responsible asset managers in Scotland identified make reference to “ESG” (environmental, social and governance factors) directly on their website or within documents available to download with less than half (47%) providing a definition of ESG. Over a quarter (26%) of responsible asset managers in Scotland lead with “Responsible Investment” (or similar) as a headline term on their website while 21% lead with “ESG”. Other lead terms employed in Scotland include: Governance & Sustainability, Stewardship, Sustainable Investment (or similar), Circular Economy, ESG & Sustainability and Stewardship / ESG. 79% of the 19 responsible asset managers have a dedicated policy, outlining their approach to non-financial factors, available on their website.
Asset managers and asset owners alike face very real problems of defining what it means to be a responsible investor. Collectively the industry in its haste to describe the problem became part of it. What confronts asset owners then becomes challenging in how to compare different asset managers reliably. This analysis of the Scottish asset management market provides a blueprint on how responsible investors, and their advisers, can cut through the broad terms and approaches used by asset managers. It shares our experiences, research and comparison of asset managers and the problems discovered.
The report highlights the spectrum of terminology, descriptions and their varying use between asset managers. As a sample of the wider market; this should help guide asset managers to hone their messaging and asset owners to navigate.
Our analysis of the Scottish responsible investment landscape at the fund level paints a mixed picture. As noted, we have identified a total of £10.7 billion AUM managed in Scotland, with £9.5 billion of that UK-domiciled. Overall, the growth rate of responsible investment over the last 15 years has been impressive. However, the recent success of Ireland, whose responsible AUM stands at over half that of rUK, indicates that Scotland could still perhaps be doing more. In terms of the composition of the Scottish responsible investment market, a few key trends emerged. Scotland, as a smaller market, has distinct specialties when compared to larger more diverse markets in rUK and Ireland. Scotland’s sector is notably weighted towards: active management, equities, open-ended investment vehicles and legacy funds.
A few large fund managers: around 99% of the responsible AUM identified was managed by the ‘big 4’ of Aberdeen Standard, Aegon Asset Management (including Kames Capital and Scottish Equitable) and Stewart investors and Baillie Gifford, with the former three alone controlling around 90% of the market.
Conducting research for the report highlights the difficulties in identifying and interpreting the data required to accurately size the responsible investing market. To mitigate against the risk of ‘greenwashing’ we applied both rigour and expert practitioner reflection to the analysis. Despite using Bloomberg and Financial Express (TrustNet) data we had to overcome significant issues regarding the quality of data (such as missing funds, false positives, missing data, inactive funds, duplicate funds, unreliable fund launch data, unreliable fund manager data and unreliable location data). For future research, it might be possible to generate a more complete account of the responsible investing landscape through surveys and interviews if asset managers are willing to disclose their levels of responsible AUM.
The value of responsible investing to the Scottish economy cannot be underestimated. With an 11% share of the total UK responsible assets under management the report reinforces Scotland’s position as a leading international centre for responsible investing. As responsible investing emerges from niche to mainstream there is a growing opportunity for Scottish asset managers to demonstrate their commitment to driving profit and purpose by developing leading global products that deliver strong financial returns at the same time as serving people and the planet.
The report highlights the opportunity to foster sharing of best practice, bring responsible investors and asset managers together and strengthen an already vibrant responsible finance ecosystem which, in the current climate, has the expertise and capital to support the Scottish Government as it looks to rebuild and reform the economy. In order to do this, we recommend that:
- A taskforce / cross party working group is established with the Ethical Finance Hub as Secretariat to enable the local financial community to work together to position Scotland as a global HQ for ethical finance.
- Public sector pension schemes in Scotland make pre-COP26 commitments to invest in line with the Government’s ambitions to create a greener, fairer and healthier country by 2032.
- The Scottish Government’s Advisory Group on Economic Recovery engages with the Ethical Finance Hub to inform and support economic recovery post-COVID-19.
At the time of writing, the Covid-19 pandemic has impacted financial markets with an unprecedented speed and ferocity. It has led to a re-evaluation of many assumptions about the global economy with health security now joining the climate emergency as the most pressing challenges of our generation. With an elevated social and environmental consciousness shared across all corners of the world, financial institutions and economic systems must adapt to better serve people and the planet. This paradigm change can accelerate the mainstreaming of responsible investing and with a strong track-record in both financial services and climate action Scottish asset managers are well placed to build on their strong foundations and play a leading role.
To access the full report please visit https://www.ethicalfinancehub.org/investingscotland2020/