Establishment Series: The Who's Who, ESG Investing Edition.
Summary paragraph: From aiCIO Magazine's Summer Issue: Environmental, social, and governance investing has gained traction, yet it is still not exactly mainstream.
To see this article in digital magazine format, click here (http://www.ai-ciodigital.com/ai-cio/2011summer?folio=34).
Environmental, social, and governance investing -- ESG, for short -- is no longer just the purview of Bohemian freethinkers, but it's not exactly mainstream either. The idea that a company can be measured not by pure short-term profitability, but by the way it manages its ESG exposures -- the core belief of the ESG movement circa 2011 --
is not something stressed in business school. Concomitant with this, acceptance, especially within the borders of America, has been torpid in the asset-owning community. Yes, some, like the California Public Employees' Retirement System (CalPERS) and the New York City Employees Retirement System (NYCERS) have allocated a small percentage of their portfolios to ESG investments but, in an absolute sense, it has failed to catch on: Of all the asset owners in the world, only 233 have signed their names to the United Nations Principles for Responsible Investing (UNPRI). "As institutional investors, we have a duty to act in the best long-term interests of our beneficiaries," the UNPRI code begins. "In this fiduciary role, we believe that environmental, social, and corporate governance (ESG) issues can affect the performance of investment portfolios." If this last statement is true, it is far from universally embraced.
This is the group that believes it -- and is acting accordingly. Of course, few if any asset owners currently overlay their entire portfolio with an ESG screen, as some proponents suggest. Few, if any, asset managers only execute ESG strategies. Few consultants specialize in this space alone -- but it's a start. To highlight their work, we've chosen representatives from all three sides of the investment triangle -- asset owner, asset manager, and consultant -- to be included in this edition of the Establishment Series.
Global Insurance Funds
Switzerland & the United States
Of all the asset-owning silos, insurance funds can be considered the first movers in the ESG space. It is not surprising: Long before it became fashionable, risk management was at the forefront of their thinking, driven by both regulation and culture. As a result, ESG-focused investments are more common in this area than anywhere else in the institutional world, with foundations as the only possible exception. Switzerland-based Swiss Re -- and, specifically, former Head of Research & Analysis Beat Luthi -- earn a special mention in this group: As far back as 1996, the group had established a sustainability portfolio via its Group Sustainability Management Unit, which gives "ecological criteria...equal weight to economic criteria in evaluating prospective investments."
United Nations Principles for Responsible Investing (UNPRI)
New York, New York
All discussions of ESG investing inevitably lead back to the UNPRI. A treatise meant to encourage shareholders to engage more actively with companies they have stakes in, it is slowly but surely gathering signatories. "If your goal is to improve corporate behavior, shareholder engagement is far more effective," the organization's Executive Director, James Gifford, told aiCIO in 2010. "Not owning something is a very poor way of effecting change." As for institutional pickup, Gifford had this to say: "Some people just get that as obvious and intuitive; others find it really hard." Launched in 2006 with $4 trillion of signatory assets signed up, it now boasts more than $20 trillion. While heavier on asset management than asset owner members, Gifford is hoping that momentum -- and friendly peer pressure, frankly -- makes the UNPRI a must-have for institutional capital going forward.
The European Pension Giants
Denmark, Netherlands, Norway
Two-thirds of European pension funds have ESG policies in place, putting them at the forefront of their peers. A result of culture and a less skeptical view of global warming science, they are far ahead of their American counterparts in introducing such programs. However, it is unhelpful to view the European market as monolithic: According to a recent report from Aberdeen Asset Management, Norway- and Denmark-based funds are the European leaders in both having ESG programs and signing the UNPRI, with Italy and Spain lagging far behind in both categories. Perhaps most importantly, due to its size and clout within the European equity markets, Norway's Government Pension Fund (Global) -- which has upward of US$525 billion in assets -- moved in 2009 to incorporate environmental and social factors, as well as good corporate governance, into decisionmaking across all aspects of the fund's management.
The Californian Giants
American pension funds, by and large, have not embraced the ESG movement. Public funds are more active than their corporate peers and, understandably, funds located in more liberal states -- namely, California -- are the most active. Enter CalPERS and CalSTRS, which together possess more than $300 billion in public capital, a moderate sliver of which is earmarked for ESG-focused investments. However, both funds recently announced that all external manager performance reviews would include discussions about how ESG factors are being incorporated into investment-making decisions. It's not a huge advance, but combining this development with their dedicated ESG portfolios makes CalPERS and CalSTRS American leaders in this space. Look for other funds -- slowly, for sure -- eventually to follow suit.
Generation Investment Management
He didn't invent ESG investing either -- but former Vice-President Al Gore's Generation Investment Management, founded in 2004 with former Goldman Sachs executive David Blood, is going a long way to advancing its cause. With nearly $1 billion in assets under management, the ESG-focused firm is using the street cred of its founding member to gain market share -- and possibly, as some fringe groups claim, enrich the founders via Gore's ability to affect policy changes in Washington and beyond. Regardless of such controversies, manufactured or not, Generation is consistent in focusing on issues of climate change, poverty, water scarcity, urbanizations, and a swath of other ESG-related aspects. If investors continue to care about such factors, look for Generation and its stable of political heavyweights to continue to thrive.
Foundations are seen as the most natural adopters of ESG investing due to the fact that their explicit mission is almost always one of humanitarianism. Still, acceptance has been more moderate than aggressive: As of 2010, the $2.5 billion Annie E. Casey Foundation dedicated $125 million to mission investing, a subsector of ESG. The $600 million Meyer Memorial Trust allocated $200 million toward the cause. The F.B. Heron Foundation -- considered a leader in the field -- put 50% of its $330 million into mission investments. As aiCIO wrote last year: "Hundreds of millions is nothing to scoff at, of course, but you wouldn't be out of line if, upon viewing these figures, a little voice of doubt asked: Is that all?" Frankly, we may have been a bit harsh. It's a start -- and one that few other asset owners, and no asset silos as a whole, are taking on to anything like this degree.
Harvard Center for Responsible Investing
Academically, Harvard University's Center for Responsible Investing is gaining steam and clout. Founded in 2003 under the auspices of Boston College, it moved to Harvard in 2010, where it acts as a "platform for dialogue" (go ahead, make fun of it now, Red States) for responsible investing. "There is a self-affirming machismo with alpha seeking," David Wood, the Initiative's Director, told aiCIO in 2010. "Many investors look at [ESG] through a gendered lens: 'Big Men' search for alpha, 'Little Girls' focus on this stuff." Ivory tower stuff it may be -- but Wood and the Center are not shy about promoting the ESG and responsible investing agenda.