Investment consulting and a sustainable financial system

Investment consultants are the primary point of contact for many asset owners in the investment market. This is particularly true in the US, UK and Japan. Consultants provide a range of advisory services to asset owners, from funding decisions, to asset allocation, manager selection and reporting processes. They frequently train sponsors and trustees on approaches to investment and emerging investment trends. They are a recognised source of authority and knowledge on investment practice. Their advice shapes the beliefs and practices of trillions of dollars of invested assets worldwide. The views that investment consultants hold about ESG factors have major implications for the sustainability of the financial system.

Investment consultants help asset owners by:

streamlining their manager research and appointment processes, thereby reducing costs;
providing asset owners with access to advanced technical expertise and investment research;
helping asset owners to build their capacity and expertise on investment issues;
understanding and interpreting the information provided by asset managers.

However, investment consultants provide little advice on implementing responsible investment, integrating ESG issues into investment research and decision-making, or on monitoring the ESG performance of asset managers. Despite pockets of excellence and some high profile projects on issues such as climate change and long-term investment, ESG considerations are not a standard part of the advice offered by investment consultants.

They are widely seen as niche service offerings, often entailing extra costs, and only to be provided when explicitly requested by asset owner clients.

Neglecting ESG issues can lead to asset owners mispricing risk and making poor investment decisions. In turn this can undermine their short, medium and long-term investment returns.

Effectively managing ESG issues is a core part of the duties owed by asset owners to their beneficiaries and to wider society. If investment consultants are to retain their position as trusted advisors, and develop their future businesses (e.g. fiduciary management), they need to ensure that their asset owner clients navigate these challenges effectively.

About this report

This report is the first output from the PRI’s programme of work on investment consultants. The primary audience are asset owners and investment consultants. They, through the client-adviser relationship, define the range and scope of services and advice, including the emphasis placed on ESG issues in this advice. Our findings are also relevant for policy makers and regulators.

The report identifies barriers relating to market structure, industry practice and policy and regulation in the consulting market. These barriers are leading to failures in the service quality given to investors. We discuss how asset owners can encourage investment consultants to better integrate ESG issues into their advice. We also discuss the barriers to investment consultants offering more integrated advice. This includes barriers on the demand (i.e. asset owner) side, on the supply (i.e. investment consultant) side and within the wider regulatory and policy framework that asset owners and investment consultants operate. We conclude by suggesting actions that could be taken to overcome these barriers.

The report is based on interviews with 22 investment consulting firms and industry experts, data from the PRI’s Reporting and Assessment framework, data on investment consultants, their clients, philosophies and staff provided by IC Research Institute, and a review of the academic and practitioner literature on investment consultants and their clients. Interviews included both ESG-specialist consultants and field consultants.

The primary geographic focus of this research was the US, UK and Australia. However, the general analysis and conclusions are relevant to all markets where asset owners rely on advice from investment consultants. The research also draws on the PRI and UNEP FI’s fiduciary duty programme, which has covered 14 markets.