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24 October 2008
Responsible Investor: Integrating ESG into Mainstream Portfolios
Source: www.responsible-investor.com
Integrating ESG into Mainstream Portfolios
The title of Responsible Investor’s first conference: “Integrating ESG into Mainstream Portfolios” begs an important question for many institutional investors who may feel overwhelmed by the increasing amount of pressure to take into account what was once considered a niche pursuit. Why integrate environmental, social and governance issues in the first place? Aren’t these the responsibilities of governments and regulators? Or even consumers if they wish to spend or save according to their personal values?
It’s a valid question and often heard. Responsible investment will take a long time to grow if supporters are not clear about what it fundamentally means. This is no easy feat, as it can signify different things depending on who you talk to and in which part of the world. The value of such a conference is that we can discuss the why and then tackle the what and how.
The answer is that responsible investment is no longer just about taking a moral stance on investment. Of course, ethics are still important. Few pension funds, for example, would realistically argue that they, or their members, would support handing money to companies who employ children in factories, or to regimes who torture individuals for free speech. Yet many could be doing just that via their investments. Such issues can often be complex and demand huge political and social reform. They are rarely helped though by investors carrying on with ‘business as usual’. Civil society groups, and increasingly the media, realise the ‘pressure’ roles of investors in this chain and are increasingly applying it where they can. In such cases, engagement with the company, or in the event of no change, divestment, may be both a moral and pragmatic stance.
However, the most important part of the responsible investment debate concerns risk and return – concepts all too familiar to investors.
Take for example, the E part of ESG: the environment. You’d be hard pressed to find an investor who would say they want to fund environmental destruction. But some of the companies they invest in will inevitably be large contributors to the dangerous accumulation of greenhouse gases in the atmosphere pointed up by the UN Panel on Climate Change. First, this could be considered a macro risk in the broadest social and economic sense. Second, governmental policy responses to greenhouse gas emissions are starting to cost polluting companies via direct or carbon taxes. Investor portfolio risks and returns will be determined by their choice of companies based on this data/regulation.
A second example is the S for the ‘social’ part of ESG. Most people working within an organisation would credit its success, or failure, to factors such as training or employee innovation, motivation and reward. Most would argue that customer loyalty is also driven by a company’s social record as part of its brand. Yet, much of the current financial analysis of companies relies on product, market conditions and management; all important, but far from the full story.
The third example concerns the G for governance. You don’t have to dig deep into the current financial crisis to find governance flaws: management remuneration geared to the short-term, lack of transparency within companies, reckless business models. If investors do not want to suffer disastrous losses, they need to know how to avoid the Enrons or the sub-prime filled banks of this world.
The credit crisis has also revealed a more holistic role for responsible investors, which could be included under the ESG umbrella, that of ensuring that the market as a whole supports sustainable, long-term economic growth to meet long-term pension liabilities.
The examples above are all deliberately simple and generic. Within the ESG ecosystem exists a variety of research approaches and investment styles that aim to improve the risk and return information that investors have today. We hope that the first RI conference on integrating ESG into mainstream investing will demonstrate that these are serious, mainstream, fiduciary strategies.
---------------
Hugh Wheelan,
Editor, Responsible Investor
(www.responsible-investor.com)
www.responsible-investor.com/images/uploads/reports/IntegratingESG.pdf
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Sustainable Investment Research Platform
Provided by Webforum