The rapid growth in sustainable funds carries risks. Reputational risk for asset managers who overpromise and underdeliver is one. But also, argues Amanda Young, risk of undoing 20 years’ of progress made by sustainable investment’s true believers.

Abrdn’s chief sustainability officer believes too much short-termism could put ESG in bubble territory. And there is tension in the system: Regions are rushing to regulate but are not coordinated. Adopting a sustainability classification is a cost of doing business with some European banks, while some US states are boycotting ‘woke’ investment strategies.

But demonstrating the real impact of Abrdn’s strategies is complicated enough. As ever, Citywire Amplify wanted to understand how Young gets things done. We talked committees and KPIs as she shared her in-tray.

Do you oversee a team or do you mostly partner with other teams within the company?

I partner with other teams, but I also run the sustainability group, which has four teams and around 30 people. Our job as the sustainability group is to set the ESG and sustainability standards for the investments division of Abrdn. We are there to uphold those standards, particularly when it comes to things like sustainability funds and sustainability expectations of those funds. We have four teams.

The first is the insights team; these are subject-matter experts looking at climate change, natural capital, and all the social issues in promoting a fairer society.

The second team is the sustainable investing team, and they are there to build the frameworks and the standards for the investment teams themselves to implement.

We have an active-ownership team. They get involved in active ownership, but the general premise is that active ownership, that’s voting and engagement, sits at a desk level and what we do is we set the standards and we uphold those standards across the investment teams.

The fourth team are what we call the sustainability specialists. We’re finding internally that a lot of people need help, support and training. Externally, the client teams need help and support in delivering what clients need. We are the subject-matter experts that help externalise our messaging, help training support, and help the client teams and the commercial aspects of sustainability.

What are your KPIs and how do you manage them?

Impact measurement is incredibly difficult. I think it’s the next big thing for the industry. There are certain things where we can measure impact, for instance, the decarbonisation of portfolios. You can measure that using different methodologies, which all start with carbon footprinting your fund and working out the carbon emissions associated with its investments, and then being able to track that over time. There is some debate over which the right tools are.

We’re doing some work at the moment on exploring the different types of carbon reduction measurement methodologies out there. The other way to measure impact is by defining impact at a fund level. You have to take every single investment and define whether they’re acceptable because they’ve met the right hurdle rates in terms of intentionality and what they’re trying to deliver, and then you need to work out what you’re going to measure.

The other thing to think about when measuring impact is lives reached. That’s a very good indicator in terms of products, environmental impact reduced, so those types of indicators. Finally, one thing that needs to be thought about is where you are in the world. Outcomes will be quite different depending on where those individual companies are operating.

What is the main challenge that you faced in the role, and how did you overcome it?

When I started out in the responsible investment industry over 20 years ago, there was scepticism about the materiality of environmental and social issues: ‘why should I think about that? That’s all tree-huggery stuff. I’m just here to invest to make money.’

The challenge was also trying to explain that to the underlying companies we were speaking with in terms of why they should be thinking about environmental, social and governance factors as material to their businesses, so very much a risk-based approach. 20 years ago it was convincing people that this was important.

This year specifically, [there is a] different set of challenges: a massive increase in regulation, and different regulation happening in different regions of the world that are not necessarily aligned, which then creates real problems.

The interest in sustainable investing has gone up substantially, which is great but brings with itself a host of challenges: people who have not been in the industry before, not been in the industry very long, seeing this as a way to make money rather than as something important to do for your underlying clients.

I genuinely believe in responsible capitalism. You need to do that in a way that keeps the underlying clients at the heart of all those conversations.

The biggest challenge I face today is the fact that the interest in this is growing so substantially that we are at risk of a bubble. People who haven’t been around for a very long time and who need to understand that this is a long-term trend, not about short-term gain, could derail the progress that we have made over the last two decades.

Is there a danger investors will give up on sustainable companies in favour of others performing in the shorter term?

As an investment management industry, we have to allow people to save for their retirement, but if they don’t have a world to retire to, there’s not a lot of point. If it’s just about making money at the expense of society and the environment, that is not to anybody’s long-term interest. We still have major problems to deal with, and the finance industry can play a valuable role in allocating capital towards solving those problems.

Those who understand that will be committed to this for the longer term. Those investors in it just to make a quick buck may not, and so we may see some investors moving away from sustainable investment stocks and portfolios. Unless you think about environmental, social and governance factors in terms of risk analysis when you’re analysing any company, you could face significant financial penalties later on.

You mentioned interest in ESG has risen. Is it the same across demographics?

Ten years ago, there was a definite demographic trend with younger people being more conscious of the state of the world and the need to change, and I think that still applies in certain regions, particularly Europe. The trend also has geographic differences. Asia-Pacific is still very concerned about returns.

But we’re seeing an increase in wanting to invest: A, to minimise the impact of climate change on portfolios, but also B, to think about that transition.

In the States, we’re seeing a very polarised debate developing with a number of states either putting in place or thinking about laws to combat so-called ‘wokeism’ in the financial industry – actually saying: ‘We will not do business with banks that are boycotting oil and gas companies or are perceived to be.’

That’s very tricky. Some fund managers who have been boycotted by certain states because they’re perceived to be anti-oil and gas, despite the fact they don’t have an exclusion policy on oil and gas. Those same fund managers are being criticised by other states who are saying: ‘You’re not going far enough. You should be avoiding oil and gas companies.’ I’m increasingly trying to explain to people that we’re there to manage the end investor’s and savers’ money, and it’s their view that should matter most in terms of how that capital is allocated.

How has the Sustainable Finance Disclosure Regulation impacted your job?

Regulation always makes your job harder, but that’s not necessarily a bad thing. The challenge I have is that ultimately we’re there to look after our client’s money. We’ve been running sustainability funds for many years, and we have built them with the client at the table, and now a regulation comes along with its own interpretation of what that should look like. For fund managers who have done this for a long time, that’s difficult because you are running funds that have been set up for a long time in the interests of your clients, and then you get regulation that wants to bucket them or classify them into certain categories, and that can be quite challenging.

In that way, regulation hasn’t necessarily been positive. The other challenge is the lack of clarity over application.

When Article 8 and Article 9 were first mentioned, it was a mad rush to say, ‘Well, everything could be Article 9,’ without understanding what that means. You had a rush of people converting funds and now, as more and more debate is happening around the classification standards of those funds, you are finding that people have been very lax and lenient in terms of their interpretation, and we have a number of fund managers now considering reversing their decision to classify those funds.

Some of that has been driven by the European banks, which have said: ‘We will not put your fund on our platform unless it’s at least an Article 8 fund.’ That’s pushed fund managers to ask: ‘How do we get it to Article 8?’

The debates around the criteria to get to an Article 8 or an Article 9 fund are still going. In the last 12 months, there has been a trend to tighten that expectation, to avoid the greenwashing that might come with converting a fund without many sustainability characteristics baked into the philosophy of Article 8.