A quick cuppa with Fiona Reynolds, Managing Director, the Principles for Responsible Investment (PRI)
Hello Fiona. At the PRI In Person conference in September, one of the main take-aways from the various conversations I had is that considering environmental, social and governance (ESG) factors into investment analysis is becoming more mainstream. Did you get the same impression?
Yes, ESG is becoming much more embedded across the industry.
One of the biggest hindrances to effective ESG integration is that it can still be seen as an after thought to the main investment process. Fund managers can have separate ESG teams that are not embedded in their portfolio management teams. Portfolio managers might be talking to companies about very different things from the ESG team and they may not always be joined up. That lack of cohesion is a big hindrance.
Increasingly, though, investment teams are finding they either have to understand ESG much better, or the ESG analysts sit within the portfolio management team. This is a really important development for getting responsible investment front and centre, which will help the whole industry.
It makes sense really, to me. If ESG is about understanding how a company or security might be affected by the context in which it is operates (for example, is it highly energy or water-intensive), then looking at these risks can help an investor understand what the likely future financial impact will be on that company. What happens if the cost of water increases, for example, or carbon taxes become more wide-spread. ESG factors may not necessarily be financial risks today, but they can easily translate into financial risks tomorrow. Do you get the impression that ESG is being seen as another valuation metric?
The language of responsible investment can be very unhelpful and confusing. Ultimately, it’s just about how you look at the long-term risks and opportunities. In that context, it does make good investment sense. Any argument against its inclusion in the investment process because it is not in line with fiduciary duty no longer makes sense because excluding ESG means the investment process is not considering the long-term risks and opportunities.
We have enough data and academic evidence now to prove that looking at ESG over the long-term can help to maximize returns. The University of Hamburg/Deutsche Asset Management; University of Oxford/Arabesque Asset Management; Harvard; and MSCI are just a few of the organisations whose studies show that looking at ESG can help to beat market benchmarks. It’s just about time horizon. A decade on from the Global Financial Crisis people are looking for a better way to invest to avoid a re-run of the events of 2007-8. Ethics and governance standards in the industry certainly contributed to the last crisis and now people are thinking about these factors a lot more carefully.
Christiana Figueres, former executive secretary of theUnited Nations Framework Convention on Climate Change (UNFCCC) and convener of the Mission 2020 initiative, has challenged the PRI to have 1% of the total combined asses of all its signatories invested in renewable energy and clean technology by 2020. Is the PRI up for the challenge and do you think it’s achievable?
A number of really large signatories have already been asking for information about the challenge and how we plan to meet it. We are happy to help facilitate the process, but each investor will have their own approach and it’s up to each signatory to accept the challenge.
A lot of our members are already taking action on climate change by investing in renewables, using their proxy voting or, for example, by engaging with traditional energy companies to discuss how they are expected to transition to a low-carbon economy.
Meeting Christiana’s challenge will be on the agenda for the next PRI In Person in San Francisco, however, so we can talk more about how to meet the challenge as a collective.
The PRI has become a widely accepted industry standard in terms of evaluating a manager’s ESG credentials. Now that the PRI is ten years old, what are you doing to make sure signatories are not just box-ticking as, in the long-term, that approach could prove detrimental if it erodes the value of the PRI’s brand?
We are looking at new accountability measures. We are now at the point where we have been around long enough, and we have the right research and tools in place that means managers no longer have any excuse for not taking action. Our consultation on a minimum standard closed at the end of September and we will be reporting on that shortly.
We expect one outcome will be the creation of a watch list, for signatories we feel are not making enough progress on ESG integration. Those organisations will then be given two years, with assistance from the PRI, to get up to speed or they will be delisted. We don’t want to be used as a tick in the ESG box.
At the same time, we are also looking at how we can leverage the leaders in this space by creating a leadership board that other investors can learn from. If we reward those at the top and remove those at the bottom, we should be able to ensure the PRI remains a valuable and credible brand.
How is this reflected in your data and reporting processes?
All signatories have to report and be assessed on their ESG credentials annually. They are then given a score, one of the benefits of which is that asset owners can have a better understanding of how individual managers are doing.
Are those scores made public?
No, they are not. We don’t feel that would necessarily be productive. We want to avoid them becoming a ranking system. They are more useful as a tool to create conversation and engagement between asset owners and managers.
Unfortunately, there is also a degree of box-ticking among asset owners. The owners are important for providing oversight, but for some, once the contracts are in place, they are not doing enough to engage in conversation or reward their managers for their ESG achievements. The best way to get anything happening in the investment industry is for the asset owners to demand it.
To what extent do you think signatories are doing enough in terms of shining the light on their own practices and using ESG insights to improve how they run their own businesses, not just the ones they invest in?
We are starting to hear more conversation about this as asset managers and owners are coming under pressure to ‘walk the talk’ on ESG. We expect this to be a greater focus area going forward.
One of the big issues for asset owners, for example, is CEO pay. From a responsible investment point of view, it’s important they have conversations with their fund managers where senior executives at those firms are earning exorbitant salaries. The same is true of diversity.
Investors have a critical role to play toward ensuring the sustainability of the financial sector. There is still a lot more to be done to have a truly sustainable financial system, but we are moving in the right direction.
Most read articles
A quick cuppa with Faith Ward, Chief Responsible Investment and Risk Officer, Environment Agency Pension Fund