 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.
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 Brie, State Street Global Advisors (SSGA) has issued a call for more than 3,500 companies in which the firm invests - representing more than $30 trillion in market cap - to increase the number of women on their boards. This is welcome news, although it is interesting that investment management is a particularly tough industry for women and penetration at senior levels is still relatively low. Oliver Wyman, for example, found that it will take until 2048 to reach 30% female representation on executive committees in the financial services industry. What do you think are the main reasons for the particularly low representation of women in the investment management industry? Historically, within the financial industry, there has been a gender bias (whether it be conscious or unconscious) toward males in the workplace. However, there has certainly been a positive move from companies being accepting of diversity to actively promoting it. There has also been a great deal of work done through trade bodies, government initiatives and industry groups. All with good reason. Numerous studies have shown that companies with a strong culture of diversity and inclusion are more successful than companies that don’t. Negative perceptions also need to be addressed, such as mistrust of the banking and investment industry fuelled by factors such as the crisis; alongside a general misconception that having a work/life balance, and being a working mother are difficult for a successful career in asset management. We need to enhance the industry's reputation among millennials from these misperceptions to nurture and developing a sustainable pipeline of female talent. Whilst there is a lot of work to do, the industry is certainly on the right trajectory to achieving it.  As global head of stewardship, what do you think the main priorities should be when it comes to engaging with companies? Would it, for example be climate change, exec remuneration, corporate tax, or something else entirely?
It is important that we engage on material issues, as we want to be sure that we are raising issues that could impact long-term value creation. Due to the range of issues, there isn’t a one-size-fits-all approach. Climate change is one of the major long-term issues and now that COP 21 has been ratified by so many countries we are going to start to see policy implementation that will create a very different backdrop for the extractive industries. We are pushing with partners like the Aiming for A coalition to get much better disclosure and reporting on companies’ transition plans. There are also geographic differences. For example, with emerging markets we have just completed a project looking at bribery and corruption risk and have had a number of good interactions with companies on the topic. We have identified potential weak spots in our holdings and entered into discussions on the topic. One of the most important things for us is that the requests we make are founded on strong economic logic.  Andrew McNally is Chief Executive Officer of Equitile Investments and author of Debtonator: How Debt Favours The Few and Equity Can Work For Us All.
Andrew, in your book Debtonator: How Debt Favours the Few and Equity Can Work For All of Us, you discuss how the widespread over-reliance on debt – brought about by corporate tax regimes that favour debt, central bank action that keeps credit costs low and an ingrained, but misguided orthodoxy among bankers and business owners alike that debt is better than equity – is damaging both business and society because it focusses wealth in the hands of the few. This contributes to extreme inequality of both wealth and asset ownership, and undermines corporate sustainability. In explaining this debt-addiction, your book points to unrealistic assumptions within the economic theories that underpin financial models still dominant today. Yet, over the last few years, we have increasingly read in the press and heard from those in the financial industry that the economy is functioning differently from how it used to. To what extent do you think economic models have moved on to reflect this new economic normality? Economics as a discipline is in a state of turmoil and on the cusp of the sort of revolution historically seen in other sciences. However, economics is still taught the same way it was 30 years ago. Equilibrium as an idea has become cast in stone and is based on the idea that humans are rational calculating machines. Nothing could be further from the truth though. Despite that, central banks’ models and those used in the banking and asset management sectors to measure risk, are still sticking doggedly to this idea of equilibrium. Scrapping the idea of rationality would, therefore, upend most of the models used in finance today.   Faith Ward is Chief Responsible Investment and Risk Officer at the £3 billion Environment Agency Pension Fund (EAPF).
Faith, the EAPF has been an actively responsible investor for over 10 years. To what extent do you think considering ESG factors is central to fiduciary duty? It is absolutely central. Those with fiduciary duty need to look at all the ESG-related risks and how materially they could impact an investment. That means really looking at the risks and opportunities, not just the traditional metrics. Do you think the definition of fiduciary duty needs further clarification when it comes to ESG? The Law Commission review in the UK made it clear ESG risks have the potential to be significant, but reinforcement through other mechanisms would help. The existing regulatory framework, for example, needs to reinforce that message. This reinforcement needs to happen globally. Do we need more regulation regarding ESG? A lot of the framework is already there. The critical point, though, is how those rules are interpreted, implemented and reinforced. Making them matter and interpreting them in a more positive manner is an important next step.  Roger Mattingly is Director of PAN Trustees, a leading firm of independent trustees working with some of the largest pension schemes in the UK.
Roger, you’ve been working in the UK pensions industry for 37 years. In your experience, are pension schemes taking environmental and/or social factors into account alongside financial returns? There is a fairly cosmetic approach to these issues. Many schemes pay lip-service to them in their investment principles saying that those factors are taken into account, but, to date, this has mainly been a box-ticking exercise. The Law Commission review (Fiduciary Duties of Investment Intermediaries) in 2014 stipulated that social and environmental impact and ethical standards should be taken into account, but ultimately it is performance that matters. That said, there has been an increase in the focus on such responsibilities among investors. A trend took root a few years ago, but so far there has been a lot of rhetoric. Have things really changed materially? Not really. We may see an inflection point where it is taken more seriously and investors have to evidence that environmental and social impacts have been meaningfully considered and taken into account. There will be an acceleration in this regard and a mandatory requirement may also come to fruition. |
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