Yesterday the Financial Times published an article stating that U.S. investors are ramping up their efforts around environmental, social and governance (ESG) factors, particularly in regard to climate change, according to a new Mercer study.
Historically U.S.-based investment institutions have lagged behind their European counterparts in implementing ESG strategies. Of the more than 915 institutions that signed the UNPRI, only 63% went on to follow the allocation guidelines.
The Mercer study entitled: “Climate Change Scenarios – Implications for Strategic Asset Allocation“, looks at 12 institutional investors with more than $3 trillion under management combined and tracked their investment behavior over the past year with regard to ESG. The study found that 80% of the institutions have increased, or will soon increase, their ESG-related engagement with either asset managers or directly with companies. This is to better understand the inherent climate risk in various strategies.
The increased demand for ESG strategies is likely due to recent market volatility, which has institutional investors searching for sustainable investment products. “Turbulence in the financial markets, issues like BP and Fukushima, and climate change are behind it, no doubt,” says Neil Johnson, U.S. managing director of Sustainable Asset Management, a $13 billion Robeco subsidiary that specializes in responsible investing.
“Collecting the material non-financial information [on climate risk] that helps you make a better informed stock selection decision in order to build a portfolio that will add value is gaining interest. Institutional investors are catching up with the thought that there’s alpha to be had, and risk mitigation and just a good sustainable, long-term way to invest,” Johnson says.
Are you surprised by the results of this study, or does it align with trends we’ve been seeing recently? Do you think we will see an even bigger increase in investor interest in 2012? Discuss!
GSAM is one of the world’s top 10 asset managers with $714.6billion in assets under its management. They recognize that environmental, social and governance (ESG) factors could affect investment performance, bring forth potential investment risks, and provide an indication of a company’s management and leadership. GSAM is working to formally integrate ESG analysis into its investment processes where “consistent with its fiduciary duty”.
“We are committed to responsible and sustainable investing and are working to further integrate ESG (environmental, social and governance) principles into investment strategies and client solutions globally. We believe responsible and sustainable investing extends beyond the evaluation of quantitative factors and traditional fundamental analysis. Where material, it should include the analysis of an entity’s impact on its stakeholders, the environment and society,” the firm said in a statement.
Goldman Sachs is probably the most well-known firm to join this list. Do you think their signing on will prompt other big name firms to do the same? Do you think the new year will bring more movement like this? Discuss!
Yesterday, Bolsa Mexicana de Valores (BMV) launched its own sustainability index, in partnership with EIRIS. The index is based on the 70 most liquid shares on the Mexican Stock Exchange. Companies who wish to be included are assessed according to their performance, impact and response to emerging environmental, social and governance (ESG) issues such as climate change and human rights.
BMV, with EIRIS and local research partner Ecovalores, developed the methodology and assessment framework for the index. These organizations also research and assess the companies that wish to be included on the index. BMV is the second largest exchange in Latin America at $450billion in stocks, behind Brazil.
To be eligible for inclusion on the index, each company’s sustainability practices are evaluated in comparison with its industry globally and have to score in the top 50% to be included on the index.
Peter Webster, Executive Director at EIRIS said: “Stock exchanges around the world – particularly those in emerging markets – are embracing the view that they have a key role to play in promoting sustainability and greater disclosure by their listed companies. We are delighted to be working with BMV as part our wider work with stock exchanges around the world”.
The four principles, similar to the six UNPRI principles, include signing up to look at integrating ESG issues into insurance business lines and promoting ESG across the insurance industry. Members of this working group include Munich Re, Swiss Re and Tokio Marine. The principles will be formally launched after this meeting and were developed under the United Nations Environment Programme Finance Initiatives (UNEP FI) Insurance Commission. The Commission comprises leading insurers and reinsurers committed to considering ESG issues in their business strategies.
The four Principles are:
We will systematically consider ESG issues in our business principles, strategies and operations.
We will engage with insurance industry participants to raise awareness on ESG issues, reduce risk and develop solutions.
We will work together with society to enhance our effectiveness in implementing the Principles.
We will be transparent by reporting on our progress and activities in implementing the Principles.
To read the full article please click here. Do you think these principles are a good idea? Do you think insurance companies should adhere to them? Discuss!
US SIF stated that while they support the IIRC’s efforts to develop an integrated reporting framework with both financial and non-financial data (environmental, social and governance (ESG) data), their primary interest is the disclosure of the most robust ESG data possible.
Because of this, US SIF would prefer to see a separate and comprehensive ESG report rather than an abridged version in an integrated report. They acknowledge the fact that there is often a division of labor between Investor Relations and sustainability departments, which results in conflicting messages and absence of internal knowledge. Further, an integrated reporting framework would force companies to understand how sustainability issues relate to every day business practices, as well as long-term strategies. It’s important that ESG data and performance progress should be made known to all types of equity and alternative investment analysts.
US SIF made five broad points in regard to the discussion paper:
Ensure integrated reporting doesn’t diminish the quality of good ESG reporting that currently exists
Reconsider the mandate that only senior management determines what are the most material issues to an organization
While US SIF would prefer to see a separate ESG report, they ask the IIRC to broaden its definition of what must be provided in integrated reports
Less input from accountancy firms and more input from sustainable and responsible investors (who are the primary users of these reports)
Greater synergies between the integrated reporting process and the GRI reporting framework
Tim Smith, Senior Vice President and Director of ESG Shareowner Engagement for Walden Asset Management, visited Cleveland yesterday to raise awareness around shareholder advocacy and socially responsible investing. Smith was part of an open discussion breakfast and spoke at a First Friday Club lunch, both at The City Club.
Before joining Walden, Smith was the Executive Director of the Interfaith Center on Corporate Responsibility for 24 years. He has won numerous awards in the fields of finance and sustainability, and serves on several boards and committees in these areas.
His address to the First Friday Club covered a variety of issues, including fracking, environmental, social and governance (ESG) issues in regard to investing and non-financial reporting, transparency, responsibility/election of boards of directors and shareholder resolutions.
In an interview after the forum, Smith said that he expects shareholder resolutions focusing on shale fracturing will continue as the practice becomes more widespread, according to The Plain Dealer. Votes in favor of requiring companies to look at the liability of fracking averaged 40% in 2011.
“People voted for it because they saw it as a risk that companies needed to address, and most of the companies understood this,” Smith said. “Significant votes only occur when you have made the case, you being the investor or the company, that it’s good for long-term shareholder value.”
UBS and BrownFlynn were responsible for bringing Smith to Cleveland and are delighted he was able to share his insights and experience with a capacity crowd at The City Club. Thank you to The City Club and First Friday Club of Cleveland for hosting.
On June 29, Principal and Co-owner Barb Brown had the privilege of attending the New York Roundtable Meeting of the International Integrated Reporting Committee (IIRC). Before the meeting we created a survey to solicit insights on the importance of integrated reporting. The participants provided us valuable feedback that we were able to share with the constituents at the IIRC meeting, and we’re pleased to share our thoughts on the meeting and high-level survey results with you.
We were honored to participate in the Roundtable alongside many thought leaders in this field, including Paul Druckman (Accounting for Sustainability), Bob Eccles (co-author of OneReport and Harvard professor), Dina Dublon (Independent Director of PepsiCo, Accenture and Microsoft Perspective) and others. The IIRC’s stated goals are to raise awareness around integrated reporting, develop a comprehensive framework for integrated reporting, and help companies along this journey. Several speakers gave their perspectives on the notion of integrated reporting, the majority of which reinforced stakeholders’ desire to understand the material link of environmental, social and governance (ESG) issues to financial performance. This led to a discussion emphasizing the need for a clear standard around materiality which factors in how externalities, such as the lack of pricing mechanisms around carbon and water, impact an organization’s ability to adequately report on these issues.
The program was both interesting and provocative with the IIRC openly seeking pilot companies to help co-create what integrated reporting might become. The IIRC plans to release a discussion paper within the next few weeks, the content of which we will share with you. From our perspective, it remains clear that integrated reporting is in the very nascent stages of development. Seasoned sustainability reporters, most likely companies within the Global 250, will be the first to consider this avenue for future reporting. For first-time or small and mid-cap reporters, we would continue to recommend the Global Reporting Initiative (GRI) Framework. When used as a management process, we believe the GRI is an effective tool for organizations to identify and manage their material ESG impacts. We are also enthusiastic about the development of GRI’s G4 reporting framework, and are confident it will lead to more effective sustainability reporting until a truly integrated reporting solution is established by the IIRC.