Investors and the public are tired of inauthentic ESG efforts in financial services, according to the co-founders of asset management firm RadiantESG Global Investors.
Co-founders Heidi Ridley, CEO, and Kathryn McDonald, Head of Sustainability and Investments, at the firm, are veterans of quant pioneer Rosenberg Equities. They left in 2020 with the goal of setting up their own firm and have now secured the backing of minority stakeholder HSBC Global Investors.
“We were really at the point in our careers where we wanted to do something that had an impact and would make a difference in the industry and in communities,” Heidi tells the Financial Services Forum in an interview with both co-founders.
“We started out saying the first question we need to be prepared to answer is why the world needs another asset management firm,” says Heidi.
The firm has published a manifesto which will define its investment goals. At the heart of it is the goal of convincing asset owners that they have a role to play in resolving social, environmental and governance issues.
They argue that this needs to be represented by financial companies themselves, with the female-owned firm committed to representing the diversity it wishes to see in investment targets.
Kathryn explains that it “rings hollow” when financial services companies advocate for diversity if this isn’t reflected in their own organisations. The increasing use of the word authenticity in the industry reflects the fact that many believe up to this point it has been lacking, she says.
While RadiantESG Global Investors has a clear brand position, it doesn’t plan at this stage to use a conventional marketing campaign to find clients.
As well as having built a strong network, the two co-founders are regular speakers at D&I and ESG events and publish thought leadership whether via papers or through LinkedIn comments. Earlier in the year the firm launched the video series Voices, which features young people talking in their own words about what sustainability means to them.
The involvement of HSBC came after a wider search for partners. The two co-founders were clear from the beginning that they wanted to work with a strategic partner but were adamant about retaining their own brand identity as it is critical to completely “walk the talk” on all matters ESG-related.
At this time they were targeting firms that didn’t have a significant ESG offering of their own. While they found a lot of interest in their ESG capability, experience and credibility, Heidi says, many of the potential backers didn’t understand why RadiantESG had to remain independent.
HSBC Asset Management, although “already a leader in sustainability and extremely diverse”, was willing to take a minority stake and accept the firm’s independence.
“They don’t need us in the same way we were thinking about it but we were vision-aligned from the beginning. They got what we were trying to achieve.”
As well as the financial backing, Heidi argues the involvement of HSBC and its long-term commitment will reassure asset owners who feel they are taking a leap of faith and help “allay the natural concerns with a start-up.” The firms will also collaborate in the future on research – HSBC is strong on environmental issues while RadiantESG has done more work on the social governance side.
Making ESG tangible, not abstract
Kathryn cites Covid and the backdrop of major social movements like Black Lives Matter as catalysing a greater focus on socially responsible investing. Nor is this purely a moral responsibility, she adds, as environmental challenges are a risk to economic activity.
There is a greater awareness and desire to “align investing with [one’s] own beliefs”.
This is not just limited to younger consumers and investors. Heidi says that older generations are becoming much more aware.
“I talk to lots of parents whose buying patterns have changed due to their kids.”
Kathryn points out that Rosenberg’s clients were institutional investors, who were aware of these long-term challenges. However, she argues that ESG issues are under-represented in the wealth management market, where awareness is now growing.
Crucially, the message from the two founders is that there is no trade off between ESG and returns.
“It’s one thing to find a list of great green companies – not all of those are going to be good investments,” says Kathryn.
“Overall we’re interested in a complete picture of strengths and weaknesses,” she says. “Our job is finding which of these companies has the best combination.
“Buy low sell high doesn’t go away just because we believe in ESG.”
In a market where most asset managers are now talking to some degree about ESG issues, how can firms convince investors they are for real? Both founders smile when the issue of carbon offset certificates is raised.
“A lot of joke science goes into that one,” says Kathryn, citing practices like double-counting or pledges to save trees that “were never going to be cut down.”
What is needed is much more granular reporting and more tangible real-world impacts as opposed to the use of scores, says Kathryn.
“Step one is to move towards reporting on real-world outcomes,” she says, saying a better measure would be the number of companies in the portfolio with greater gender diversity or reporting on how a company is reducing single-use plastics.
“We’re not in a position of comparing [ESG] themes with other themes, but what we can do is talk about evolutionary steps in product, operations and policies.”
She says it’s important to give clients information they can communicate to others in their company.
“The people we’re reporting to often have to turn around and talk to others. Let’s give people language that is natural to them rather than these abstract scores.”
