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Asset management firms don’t invest as principals: they invest as agents for their clients. But as principals they can choose which clients to seek to serve and in what capacity.

Firms serving authoritarian states that stand accused of crimes against humanity run serious business risks. This project identifies these risks and offers a framework for firms to address them.

Public trust in investment managers is low, but client trust is higher. The commercial landscape has shifted towards ESG and investment managers have repositioned their brands towards responsible capitalism. Failure to deliver would erode client trust in investment manager brands.

Public trust in the private sector in general has grown steadily over the past decade. But financial services are the least trusted sector, and trust in the sector has dropped sharply in recent years (figure 4). Moreover, financial advisory and asset management as a subsector commands worryingly low levels of trust.[1]

Figure 4: Trust in the Private Sector, Financial Services and Select Financial Services Subsectors, 2021

Source: Edelman Trust Barometer, 2021

This low level of trust in the industry on the part of society at large should be – and is – of concern to both regulators and the industry. But firms can take comfort that trust is somewhat higher amongst their targeted client base. The proportion of retail investors with more than $100,000 in investible assets trusting the financial services industry sits at 60%, and trust amongst institutional investors with more than $50 million is markedly higher at 86%.[2]

Trust has long been recognised as foundational for building brand, market share, and profitability across sectors.[3] It is perhaps the most important commodity in the asset management industry. On a purely financial basis, intangible capital makes up 96% of the market value of the top ten publicly traded pure-play asset management firms.[4] This implies that such firms trade mainly on their reputation, the culture that binds their employees together, and the relationships that they maintain with their stakeholders. The commercial imperatives to building and projecting strong brand values to build trust are significant.

The commercial environment has changed radically over recent years. Investment management firms have evolved not only their investment processes and product offerings to meet this change. They have also evolved their brand values.

The growth in client interest and demand for responsible investment products has looked at times exponential. The Investment Association’s 2020-21 Investment Management Survey indicated that around half of assets managed in the UK asset management industry were integrating ESG in their investment processes in 2020, up from 37% in 2019.[5] And almost every significant asset manager has become a signatory to the Principles of Responsible Investment (PRI), accounting for $121 trillion in assets under management (figure 5). In becoming a signatory, firms commit to incorporate ESG issues into their analysis and decision-making process, ownership policies, and in their engagements with firms, better aligning investors with the broader objectives of society.[6] And one recent industry-wide survey found that 77% of retail and 100% of institutional end investors were interested in, or already using, ESG strategies.[7]

Figure 5: The Growth of ESG investing; PRI Asset Owners (AO) and Other Signatories, number and Assets under Management 2006-2021

Source: UN PRI[8]

There is also evidence that institutional clients are starting to ask harder questions of investment managers on ESG. The PRI, for example, distributes model Due Diligence Questionnaires to its asset owner signatories, to help them quiz the fund managers who hope to work for them. These include suggested questions asking whether the fund manager conforms to international standards such as the UN Global Compact.[9]

Until recently, these questionnaires have been largely focused on investment processes. They ask, for example, whether the fund manager considers human rights to be a material ESG factor in its investment strategy. However, in June 2022 the PRI published its first DDQ on Diversity, Equity and Inclusion (DEI), which by its nature focuses more strongly on the fund manager’s own governance and corporate strategy.[10] Interestingly, this questionnaire also suggests that investors ask fund managers whether they consider the UN Guiding Principles on Business and Human Rights when forming their internal DEI policies.

There is still a big gap between this kind of questioning, and a world in which fund managers are routinely challenged by prospective clients over their management of assets for repressive regimes. But the principle that a responsible asset owner may ask probing ESG questions of fund managers seems well established; and the principle that those questions need not be limited to investment strategy, but include the firm’s own business practices, increasingly so. The idea that big institutional asset owners – themselves under pressure to stay at the forefront of responsible investment – will start asking questions about the kinds of institutions and regimes that managers are happy to work with, does not seem so far-fetched.

As for retail investors, the CFA Institute’s 2022 Investor Trust Study warns that trust could be damaged if asset managers’ responsible investment pledges are seen to be insincere. This is not the case today: almost nine in ten institutional end investors, and just under half of retail investors are confident about the sincerity of firms’ ESG messages. As far as more general brand values go, three quarters of advised retail investors think that it is at least somewhat important to have shared values with their manager, rising to 86% for under forty-five-year-olds.[11]

In recent years asset managers have signed up to a proliferation of responsible investment initiatives and codes of conduct. Many have done so with sincere intentions, some merely to enhance their brands – but for most it will be a mix of both. The Net Zero Asset Managers’ Initiative, Climate Action 100+, and the UK and European Sustainable Investment Forums are just a few of the many initiatives that investment management firms have joined as part of their move towards responsible capitalism. Other examples include the Global Vaccine Investor Initiative, the Transition Pathway Initiative and the UK Women in Finance Charter.

Most significantly from a human rights perspective, over half of the $90 trillion managed by the largest fifty asset management firms at the end of March 2022 is now managed by firms that are signatories of the UN Global Compact (figure 6).[12] The UN Global Compact is the world’s largest corporate sustainability initiative in which signatory firms pledge to operate in ways that, at a minimum, meet fundamental responsibilities in the areas of human rights, labour, environment and anti-corruption.

The first of the UN Global Compact’s Ten Principles is that “businesses should support and respect the protection of internationally proclaimed human rights”, with Principle 2 adding that businesses must “make sure that they are not complicit in human rights abuses”.[13]

The UN Global Compact draws the meaning of ‘human rights’ referred to in its principles specifically from the 1946 United Nations Universal Declaration of Human Rights. In a joint note, the Global Compact and the Office of the High Commissioner for Human Rights (OHCHR) have explained how the UN Guiding Principles on Business and Human Rights – a set of principles drawn up by a team led by Professor John Ruggie after a six year consultation, and unanimously approved at the UN Human Rights Council in 2011 – “provide further conceptual and operational clarity for the two human rights principles championed by the Global Compact”.[14]

Figure 6: Largest 50 Asset Managers by Assets under Management and UN Global Compact Signatory Status (Blue = signatory; red = non-signatory)

Source: ADV Ratings, United Nations[15]

A number of firms from within the asset management industry have since been calling to make the observance of UNGPs a legal requirement of all firms across jurisdictions.[16] And as we outline below in chapter 4, there are multiple developments in train that would make important aspects of the UNGPs legally binding.

Protecting human rights is a key area of concern for asset management clients. Asked to rank the importance of ESG-related areas for their investments, institutional and retail investors put climate change and carbon emissions as their primary concern. But for retail investors, human rights comes in at number four on a list of 19 issues.[17] And on the face of it, the industry has made significant steps to incorporating human rights analysis not only into their investment analysis but also their businesses.

Investment managers have increasingly positioned their brands as strong values-based partners – champions of corporate responsibility. This positioning has been a matter of business exigency; such positions are required to survive and thrive in the new commercial environment if they are to both attract and retain staff, build and sustain a healthy corporate culture, and grow their profitability.

Building and maintaining trust as values-based firms has a strong commercial imperative. And we only need to look to DWS’s recent experience to see what losing trust in this area means.[18]

Back to Executive Summary

On to Chapter 4

[1] Edelman (2021): 2021 Edelman Trust Barometer: Financial Services

[2] CFA Institute (2022): Enhancing Investors’ Trust – 2022 CFA Institute Investor Trust Study

[3] Arjun Chaudhuri & Morris B. Holbrook (2001): The Chain of Effects from Brand Trust and Brand

Affect to Brand Performance: The Role of Brand Loyalty, Journal of Marketing Vol. 65 (April 2001), 81–93

[4] Tangible book capital subtracted from market capitalisation for the top ten investment management firms (ranked by AuM) whose business is overwhelmingly investment management services: Blackrock Inc, Amundi SA, DWS Group GmbH & Co KgaA, Invesco Ltd, T.Rowe Price Group Inc, Franklin Resources Inc, Schroders Plc, Blackstone Inc, Affiliated Managers Group Inc and Brookfield Asset Management Inc. The median proportion of intangible capital to market capitalisation was 96%, and the unweighted average was 91%. Data sourced from Financial Times, September 20 2022.

[5] IA (2021): Investment Management Survey 2020-21, p23

[6] PRI: What are the Principles for Responsible Investment?

[7] CFA Institute (2022): Enhancing Investors’ Trust – 2022 CFA Institute Investor Trust Study, pp.21-2

[8] PRI: About the PRI

[9] PRI (2022): Responsible investment DDQ for listed equity investors; Responsible investment DDQ for hedge fund investors

[10] PRI (2022): Diversity, equity and inclusion DDQ for institutional investors

[11] CFA Institute (2022): Enhancing Investors’ Trust – 2022 CFA Institute Investor Trust Study, pp.21-2

[12] UN Global Compact (September 2022): See who’s involved

[13] UN Global Compact: The Ten Principles of the UN Global Compact

[14] UN Global Compact (July 2011; updated June 2014): The UN Guiding Principles on Business and Human Rights: Relationship to UN Global Compact Commitments

[15] ADV Ratings (March 2022) World’s Top Asset Management Firms; United Nations (September 2022) Global Compact Signatory Status

[16] The Investor Alliance for Human Rights, a collection of 105 investors, investment managers, and investment consultancies managing a collective $5 trillion, called for the UN GPs to be enshrined in law in 2020. See also Business and Human Rights Resource Centre (2022): Investor Letter for UK Human Rights Due Diligence      

[17] CFA Institute (2022): Enhancing Investors’ Trust – 2022 CFA Institute Investor Trust Study, pp.22

[18] Financial Times (2021): German police raid DWS and Deutsche Bank over greenwashing allegations


2 responses to “Trust in Investment Management”

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