Getting investors to drive corporate sustainability has been tough, but they seem to be finally waking up
Peter Webster is a patient optimist. That’s a must-have quality in his line of work – providing owners, managers and analysts with the information they need to make socially responsible investment (SRI) decisions that move markets.
He’s been in the game a long time. As CEO of EIRIS since it was founded in 1983, Webster has been a pioneer in the development of ratings and research based on the environmental, social and governance factors more commonly known as ESG. Today EIRIS monitors some 3,500 companies globally across 100 ESG areas ranging from climate change and human rights to corporate governance, and has a client base that includes banks, wealth managers, asset managers and charities.
Investors have trailed behind corporates in terms of sustainability leadership, Webster admits, but an increasing number are starting to do interesting things. Signatories of the Principles for Responsible Investment (PRI), for example, have to report every year on what they’ve done to engage with companies and to integrate ESG into their investment practices, and this is driving best practice as more investors get on board.
The Principles for Responsible Investment
With 1,380 signatories representing $59tn in assets under management, the United Nations-supported Principles for Responsible Investment (PRI) Initiative is an international network of investors collaborating to put six key principles into practice. Its goal is to understand the implications of sustainability for investors and support signatories to incorporate environmental, social and governance (ESG) issues into investment decision-making and ownership practices.
The six Principles are voluntary and aspirational, offering a menu of possible actions for incorporating ESG issues into investment practices across asset classes as follows:
1. We will incorporate ESG issues into investment analysis and decision-making processes.
2. We will be active owners and incorporate ESG issues into our ownership policies and practices.
3. We will seek appropriate disclosure on ESG issues by the entities in which we invest.
4. We will promote acceptance and implementation of the Principles within the investment industry.
5. We will work together to enhance our effectiveness in implementing the Principles.
6. We will each report on our activities and progress towards implementing the Principles.
Launched in 2006, the PRI Initiative has quickly become the leading global benchmark for responsible investment. Investors signing the Principles publicly commit to adopt and implement them, where consistent with fiduciary responsibilities. They also commit to evaluate the effectiveness and improve the content of the Principles over time.
Few people are better placed to take the pulse of responsible investment, and according to Webster we may be reaching a watershed in how investors approach sustainability. Here are four reasons why.
A tipping point on climate
Traditional SRI concerns include international law, weapons, alcohol, tobacco and gambling, but the word increasingly on investors’ lips – mainstream and SRI alike – is climate. “Climate is huge. The question of low carbon futures: it’s not going to be a blip,” Webster insists.
He sees COP21 in Paris as hugely important, a potential tipping point. “It will reinforce the feeling that this is the way we’re going, so people will need to start thinking about the journey and how to get there.”
That means huge discussions around getting resource companies to plan for a different future. “It calls for forceful stewardship – owners sitting down in a very direct way with companies that may be affected and saying we need an alternative plan and we need it soon – we own the company that you are running.” Inconceivable only a few years ago, Shell, BP and Statoil have all recommended shareholder climate resolutions to their shareholders.
The divestment movement is reinforcing this shift. “It’s the biggest thing I’ve seen in 30 years: much, much bigger than apartheid which was a big feature when my company was being formed,” Webster says. “Divestment has challenged investors of all sorts across every type of fund. A lot of people who say ‘we do not do divestment in principle’ or ‘we do ESG another way’ suddenly have to come up with good explanations as to why these strategies are better than divestment.”
The divestment movement
When Bill McKibben and the NGO 350.org launched their “Do the Math” divestment roadshow in 2012 on the back of McKibben’s landmark Rolling Stone article, no one could have guessed how it would scale. More than 250 major institutions – including universities, faith organisations, local authorities, pension funds and foundations – have since committed to divest from fossil fuels. Now California has become the first US state to pass a state-level divestment bill, SB185.
The aim of divestment is to get rid of unethical stocks, bonds or investment funds – in this case due to their climate change impact. By late 2013, research by Oxford University showed the fossil fuel divestment movement had become the fastest growing social campaign in history – far greater than the anti-apartheid movement and anti-tobacco lobby in their time. And its impact is far from over.
In October 2014, the heirs to the Rockerfeller oil fortune withdrew the John D Rockerfeller fund from fossil fuel investments and in June 2015, Norway’s sovereign wealth fund pledged to sell off its coal investments.
According to 350.org’s website, divestment “isn’t primarily an economic strategy, but a moral and political one”. The total value of divestment is tiny, not even a “blip on the world’s capital markets” according to Marc Gunther, writing on Yale Environment 360. But that may change as the spectre of stranded assets increasingly shapes the debate.
With heavy-hitters such as the Bank of England and World Bank now warning of potential losses in share values, former US treasury secretary Henry Paulson talking of a “carbon bubble”, and Carbon Tracker predicting losses of up to $6tn in the next decade, divestment may turn out to be the most financially savvy strategy of all.
Protect, respect and remedy
Another issue impacting investment is human rights. When it comes to the social element of corporate performance, the cutting edge for Webster is the new level of rigour being brought by top companies to the way they manage and report on human rights.
The UN Guiding Principles Reporting Framework sets out good challenges, and companies are being encouraged to raise their game to meet them. EIRIS has also co-developed a Corporate Human Rights Benchmark (CHRB) to rank companies’ human rights performance. Designed to harness market competition, the benchmark will apply more than 50 indicators based the concept of salient risk to drive better human rights performance, improved policies, processes and practices.
Following public consultation the CHRB draft indicator methodology will be finalised and test-driven in June 2016 in a pilot ranking covering the top 100 globally listed food and drink/agriculture, apparel and extractives companies. Over the next three years the CHRB will be expanded to cover the top 500 global listed companies.
Getting to the top
The G may come last in ESG, but how corporate boards set tone, vision and strategy comes first for investors. “Investors want to know that the boards of companies have a clear vision about where the company is going – a clear strategy, a good way of getting there, a clear way of managing risk, and succession planning,” Webster explains.
That increasingly includes good board-level metrics for environmental and social performance and how well the dots are being joined between company impacts and business strategy so that knowledge can be used to the advantage of the company.
A sustainability skill-set will be key to board appointments. “In the future,” Webster predicts, “the level of expertise on these issues on boards is likely to be something that people look at.” Investors need to be sure the right skills, processes and experience are in place for people at board level to make good judgments, that a broad range of stakeholder views is represented, and that there is sound understanding of environmental issues and regulation.
“People will be looking at the CVs of board directors to check if they’ve got the right skills,” Webster says. “If companies aren’t performing well in one area, which members of the board may be falling behind? We have some clients who are interested in using their re-election votes if they’re not happy, who may start to withhold votes for directors at the point of re-election to get the communication going.”
The best companies in Webster’s view are the ones already demonstrating how ESG issues tie up with their business models and long-term success. This more integrated reporting approach is a step towards being able to link ESG with growth projections. To enable this, investors need disclosures that show:
whether the company has saved money by looking at these issues
whether the company is spending money in order to deliver on them
what benefits the company sees in terms of its future licence to operate
what the thinking is in the company about why these issues are important
A final wake-up call for investors, if they need one, is the values shift taking place as millennials enter the market, with strong convictions about investing in ways that back their beliefs about the way the world should be. This, according to Webster, will be a big driver of the responsible investment space and that, in turn, will be a driver of the corporate space.
“This has all the features of a trend that’s going to stick,” says Webster. “I’ve seen US wealth managers surveying their client base and the millennials and saying ‘wow this is different’. The corporates are saying the same – the generation of people they want to attract into management share millennial values.”
It’s a move that really can’t come soon enough. Investors, like regulators, have huge market clout and the power to make all companies – not just leaders – lift their game. Helping with the “tail”, as Webster puts it, is where investors can really make a difference.
Quick facts about EIRIS
EIRIS is a social enterprise founded in 1983 in London, providing research for responsible investors.
Provides environmental, social, governance (ESG) research and independent assessments for responsible investors of companies’ ESG performance, and advice on integrating this with investment decisions.
Offices in London, Paris and Washington, DC, and a network of partners in Australia, Brazil, Germany, Israel, Mexico, South Korea and Spain.
Key areas of interest:
In-depth coverage of about 3,500 companies globally, and about 100 different ESG areas including climate change, human rights and corporate governance. EIRIS does not give overall company rankings.
Main client groups
More than 200 clients including asset owners, asset managers, banks, wealth managers and charities around the world.
investors Investment EIRIS c-suite interview c-suite divestment responsible investment