UNIVERSITE LIBRE DE BRUXELLES
SOLVAY BRUSSELS SCHOOL OF ECONOMICS AND MANAGEMENT
Conformance and Non Conformance of Asset Managers to the
Environment, Social and Governance Pressures
-Sensemaking capacities and the use of externally defined information-
A thesis submitted for a PhD in Economics and Management by
Kyoko Sakuma
18 June, 2012
MEMBERS OF THE PHD JURY Thesis Director
Dr Manuel HENSMANS, Professor of Strategic Management at the Solvay Brussels School of Economics and Management, Université Libre de Bruxelles
Internal Members
Dr Christian BLUEMELHUBER, INBEV BAILLET LATOUR professor for euromarketing, at the Solvay Brussels School of Economics and Management, Université Libre de Bruxelles Dr Eric DE KEULENEER, Professor of Finance and Regulation at the Solvay Brussels School of Economics and Management, Université Libre de Bruxelles
Dr Jan MATTIJS, Professor of Public Management at the Solvay Brussels School of Economics and Management, Université Libre de Bruxelles
External Member
Dr John HOLLAND, Professor of Finance and Accounting at Business School, Glasgow University
Dr Céline LOUCHE, Professor of Corporate Responsibility, Vlerick Leuven Gent Management School
TABLE OF CONTENTS
TABLE OF CONTENTS iii
LIST OF FIGURES vii
LIST OF TABLES viii
APPENDIX ix
ABSTRACT x
ACKKNOWLEDGMENTS xiii
1. INTRODUCTION p. 1
2. CONTEXT AND RESEACH QUESTION p. 4
2.1 What is sustainable investment? p. 4
2.1.1 Evolution of practice and definition p. 4
2.1.2 Market size and power p. 6
2.2 Key actors p. 9
2.2.1 ESG information providers p. 9
2.2.2 Asset managers p. 11
2.2.3 Asset owners p. 11
2.2.4 Sustainable Investment industry associations p. 12
2.2.5 Collaborative voluntary initiatives p. 13
2.3 EU Regulatory development p. 14
2.3.1 Deregulation and sustainable development agenda p. 14
2.3.2 Finance crisis and re-regulation p. 16
2.4 Asset management and Information use p. 18
2.4.1 Intangibles and non-financial information p. 18
2.4.2 Nature of ESG information provided by external providers p. 20
2.4.3 Use of ESG information by asset managers p. 21
2.5 Current research agenda in sustainable investment p. 23 2.5.1 Overcoming behavioral obstacles to ESG integration p. 24 2.5.2 Institutionalization of sustainable investment practices p. 25
2.6 Research question p. 27
2.6.1 Dominant assumptions in the sustainable investment research p. 27
2.6.1.1Asset managers are too short-termists to engage in sustainable
investment p. 27
2.6.1.2Absence of better ESG information impedes long-term thinking p. 28 2.6.1.3ESG information integration needs institutionalization p. 28
2.6.2 Research question p. 29
3. METHOD p. 31
3.1 The research design p. 31
3.1.1 Grounded theory approach p. 31
3.2 Sample selection p. 32
3.2.1 Selection of countries p. 32
3.2.2 Selection of global equity asset managers p. 33
3.3 Data collection and analysis p. 33
3.3.1 Expert consultations and focus of questions p. 33 3.3.2 Challenges of data access and representation p. 35
3.3.3 Data collection process p. 37
3.3.4 Data analysis p. 38
3.3.5 Point of saturation p. 39
3.4 Reliability and validity p. 40
3.4.1 Reliability and coding validation p. 40
3.4.2 Member validity and expert feedback p. 41
4. EMERGENT THEORIES p. 44
4.1 (Non) conformance assumptions in other literature p. 44 4.1.1 Old and new institutional theory and resource-dependency theory p. 44
4.1.2 Resource-based theory of the firm p. 46
4.1.3 Behavioral finance theory p. 48
4.1.4 Cognitive psychology and judgment/decision-making theory p. 48
4.1.5 Sensemaking theory p. 50
4.2 Overview of potential drivers of conformance and non-conformance p. 53
4.2.1 Conformance drivers p. 53
4.2.2 Non-conformance drivers p. 55
5. DICUSSION OF FINDINGS IN TERMS OF EMERGING THEORY OF
WHY ASSET MANAGERS DO AND DONOT CONFORM p. 59
5.1 Data summary and structure p. 59
5.2 Conducing factors for conformance and non-conformance p. 63 5.2.1 Institution-Organization level: Changing external pressures p. 78 5.2.1.1Growing public distrust and pressures for transparency p. 78 5.2.1.2Impact of financial crisis on corporate governance p. 81 5.2.2 Organization-Team level: Internal organizations p. 82
5.2.2.1Internal mode of operations p. 82
5.2.2.2Risk management p. 85
5.2.3 Team -individual level: Sensemaking capacities p. 86 5.2.3.1Motivations to consider sustainability p. 86
5.2.3.2Perceived goal p. 88
5.2.3.3Perceived competence p. 90
5.2.3.4Cause-effect assumptions p. 91
5.2.4 Team-individual level: Decisions to conform or not conform p. 93 5.3 A grounded theory model of asset manager conformance and non-conformance p. 96 5.3.1 Sensemaking capacities as a pivotal concept p. 96 5.3.2 Distinctive sensemaking capacities: behavioral integration of p. 98
sustainability and return concerns
5.3.3 A conceptual model p. 99
5.4 Proposition development p.102
5.4.1 A concept of distinctive sensemaking capacities p.103 5.4.2 Distinctive sensemaking capacities as organizations’ p.104
competitive advantage
5.3.3 Distinctive sensemaking capacities and internal culture p.108
5.5 Limitations p.112
6. DISCUSSIONS AND IMPLICATIONS p.114
6.1 Theoretical contributions and implications p.114
6.1.1 Challenge dominant assumptions in sustainable investment research p.114 6.1.2 Non-conformance motivations and resource-based view of sustainable p.115
investment
6.1.3 Empirical contributions to the literature in stakeholder sensemaking by p.116 organizational members
6.2 Managerial implications p.116
6.2.1 What is ‘sustainable investment’? p.117
6.2.2 Specialization versus generalization p.118
6.3 Policy implications p.118
6.3.1 Institutional investor capacity building p.119
6.3.1.1 ESG information disclosure p.119
6.3.1.2 ESG criteria reporting p.120
6.3.2 Institutional investor oversight p.122
6.3.3 Corporate governance in financial institutions p.123
6.3.3.1 Risk governance culture p.124
6.3.3.2 Remuneration disclosure and interest alignments p.125 6.3.3.3 Board diversity and shared value creation p.126
6.3.4 Overall policy recommendations p.128
7. CONCLUSION p.130
8. BIBLIOGRAPHY p.133
LIST OF FIGURES
Figure 1 Integration and Engagement by country p. 8
Figure 2 Selected ESG information providers in timeline p. 9
Figure 3 Type of asset owners p. 12
Figure 4 An overview of regulatory context and voluntary initiatives of asset p. 18 management industry
Figure 5 Ratio of unexplained value to total corporate value, 1980 to 2002 p. 19 Figure 6 External and internal resources for ESG information p. 22
Figure 7 Research design overview p. 32
Figure 8a Hypes of sustainable investment (Factiva search) p. 34
Figure 8b Hypes of ESG (Factiva search) p. 34
Figure 9 A summary of coding process p. 39
Figure 10 Framework to study asset manager conformance and non-conformance p. 57
Figure 11 Data structure p. 61-62
Figure 12 Movement of asset managers among four conformity dimensions, p. 94 2007 to mid-2011
Figure 13 A model of conformance and non-conformance to ESG pressures p.100 by asset managers
Figure 14 A cycle of adaptation for conforming and non-conforming asset p.111 managers
LIST OF TABLES
Table 1 ESG integration for internally active managed AUM p. 7 relative to market value
Table 2 UN PRI six principles p. 13
Table 3 ESG framework by GS Sustain – Global technology hardware p. 21
Table 4 Overview of case selection process p. 36
Table 5 Different views on conformance /non-conformance by p. 47 institutional theorists, resource-dependency theory and
resource-based view of the firm
Table 6 Different views on conformance and non-conformance by p. 50 behavioral finance, cognitive and judgment/decision-making
theorists
Table 7 Conformance and non-conformance seen by sensemaking theories p. 53 Table 8 Overview of conforming and non-conforming asset managers p. 59 Table 9 Representative supporting data for the nine constituent concepts p. 63-78 Table 10a Relationship among four aggregate concepts for asset managers p. 96
who moved conformity dimensions
Table 10b Timeline of sensemaking capacities and triggering events p. 97
APPENDIX
Appendix 1 Examples of different methods used p. 145
Appendix 2 An overview of interviewees p. 146
Appendix 3 Open code memo- selected examples p. 147
Appendix 4 Axial code memo – first round p. 211
Appendix 5 Axial code memo – second round p. 292
Appendix 6 Aggregation memo p. 306
Appendix 7 ESG information used by asset managers p. 309
ABSTRACT
This thesis focuses on a central behavioral paradox in the asset management community. Recent decades have brought an upsurge in initiatives throughout the investment community to voluntarily integrate sustainability issues into investment decisions. The financial crisis has however revealed behavioral inconsistency and deepening irresponsibility.
Today, sustainable investments represent USD 10.7 trillion, or 7% of the entire market, of assets under management and it is growing steadily.
One important driver of this growth was the emergence of specialized research agencies that standardized measurement of companies’ environment, social, and governance (ESG) performance and sold such information as a tool to evaluate or pressure corporate conducts. More recently, sell-side research, financial news, and market-index providers joined the ESG information market, where they aim to support more mainstream asset managers in integrating ESG information into investment decisions.
A dominant assumption has taken hold in a large part of the investment and regulatory circles: asset managers’ use of ESG information will induce a behavioral change so that they automatically integrate companies’ sustainability to investment return concerns.
Understandings of what constitutes sustainable investment have been largely practitioner- driven. The academic community took little interest to challenge the assumption. Remarkably, more scholars have come to assume that conformance to institutional pressures to add ESG information to investment strategies will induce more sustainable and long-term behavior of investors and companies. ESG information integration is believed to be a behavioral enabler for mainstream investors to systematically embed sustainability in investment strategies.
Because of the assumption, theory building of asset manager intrinsic motivations to engage in sustainable investment remains unexplored. Main contribution of this research is to generate a deep theoretical understanding of asset manager non-conformance to the ESG pressure to engage in sustainable investment.
The research starts by questioning the dominant assumptions made in the sustainable investment field. While working in the industry, I witnessed some asset managers’ practices of replacing the externally defined ESG information with their own research based on narratives to better understand investee companies. The research question came out of this experience: why do some asset managers use ESG information to engage in sustainable investment while others do not? Do pressures to integrate ESG information really induce more sustainable behaviors on the part of asset managers? These self-inquiries led to a wide
Surprisingly, non-conformance was an under-researched theme. Given the scarcity of the research, I sought a method that would enable grounded theorizing based on asset managers’
own experience and interpretations.
Grounded theory research draws on asset manager interviews, archival documents, expert and practitioner consultations and feedback during 2007 and mid-2011. To reflect the global nature of sustainability, I focused on global equity asset managers working in thirteen institutions in three lead markets with most geographically diversified sustainable investment, UK, the Netherlands and Belgium.
Theory building from the ground up does not happen in vacuum. I developed a framework to study conformance and non-conformance drivers to facilitate the concept elicitation. The question of conformance and non-conformance has been studied by institutional, resource-based view of the firm, behavioral finance, cognitive and sensemaking theorists but in a disintegrated manner. I enhanced insights by way of aggregating and exploring the drivers. The framework illuminates the viability of both conformers and non- conformers in sustainable investment practices. Both are leadership activities of asset managers based respectively on explicit and implicit motivations. It illustrates short-term and opportunistic motivations of conforming managers, as opposed to long-term and substantial motivations of non-conforming managers to integrate sustainability and return-making in their investment decisions.
The research results presented hereafter provide a significant theoretical and empirical contribution. Drawing from insights and perspectives from the practitioners, a grounded theory model of asset manager conformance and non-conformance highlights a pivotal concept of sensemaking capacities. It reveals a counter intuitive pattern of asset manager learning. Non-conforming asset managers have developed a distinctive capacity to integrate sustainability and investment return concerns regardless of public pressures to do so. This distinctive sensemaking capacity, founded on behavioral integration of external expectations with own motivation, goal, competence and know-how, was the strategic resource for the organization. Their behavioral integration of sustainability and return generation is so highly developed, that adding the ESG information in their investment strategy would actually impair their capacity to make sense of sustainability. Indeed, I find that non-conforming asset manager teams have sustained consistent returns and increased client assets throughout the financial crisis. In absence of such behavioral integration and sensemaking capacities, conforming managers failed to sustain consistency or suffered from under-funding. To stay
investment strategies. However, such explicit demonstration of leadership has not been accompanied by distinctive sensemaking capacities. I find that conforming managers were less capable of integrating sustainability and return-generation, which subsequently reinforced their short-termism and opportunism.
The finding of this thesis points to the importance of ‘behavioral integration’ instead of ‘explicit conformance’ of asset managers. The academic community may need to shed a more critical eye on ESG integration by asset managers. Institutional pressures to adopt such information may not induce more sustainable behavior, as ESG know-how is likely to deprive a chance to develop distinctive sensemaking capacities. Furthermore, it may even hurt the sensemaking capacities of managers who have behaviorally integrated sustainability and return-generation. While I hope to trigger a re-think amongst academics how to promote sustainable investment, my findings has theoretical and empirical contributions. The most important theoretical contribution is identification of non-conformance variables to engage intrinsically in sustainable investment. Empirical evidence on non-conformers, corroborated with resource-based view of the firm, also enhances the understanding of non-conformers’
motivation to sustain competitive advantage.
Findings also lead to managerial and policy implications. I carried out this research in the midst of the financial crisis, a time of mounting European policy debates how to build investor capacity to induce long-term and sustainable behaviors. The European Commission’s Internal Market Directorate-General is set to publish a directive proposal that mandate ESG information disclosure to companies and ESG reporting by investors. This adds weight to already published procedural measures to strengthen corporate governance at financial institutions. These policy initiatives emerged largely because of expert consultation and anecdotal evidences. In addition to recommendations to specific pieces of legislative proposals, this research makes an overarching policy proposal. The EU Commission needs to reexamine if the current policy measures lead to further symbolic demonstrations of ESG usage without accompanying sustainable behavior at the cost of real economy. EU equally needs to pay more attention to non-conforming asset managers’ distinctive capacities and enabling mechanisms. Reporting burdens may inadvertently impair non-conforming managers’
capacities to sustain long-term performance and may induce a contradictory policy consequence of increased public distrust.
