In the classic 1941 film ‘Citizen Kane’, a wizened old businessman suggests that it is no trick to make a lot of money - “if all you want to do, is to make a lot of money”. The challenge set before the modern business world is to make a lot of money in a way that supports the advancement of principles of responsible investment.
Across the Asia Pacific region, the three-pronged concept of ESG - environment, sustainability and governance - has been embraced to widely varying degrees. Australia has the highest number of signatories to the UN’s Principles of Responsible Investment (PRI) charter. The New Zealand Superannuation Fund has a well-developed SRI policy that is written into its Government mandate. Elsewhere in Asia, the concepts of responsible investment are well understood, though practice is still mixed.
Cordiant Capital’s David Creighton, who has 10 years’ experience at raising capital from pension funds, believes it is getting easier to talk to pension funds about ESG and how it is integrated into investment management: “The most important thing we have learnt is the change in how investors view SRI. They used to consider it was just another risk they had to manage. About 18 months ago, we realised something had changed and that investors were starting to use ESG screening as a way of managing risk.”
In Asia, Creighton observes, the issues around governance are very different from the western experience. “The public doesn’t respect or trust companies in Asia, because of the level of corruption that still exists. So we have worked with institutions on reporting structures, as a way of establishing standards and improving processes to create value.”
Creighton says the challenge is to keep everyone on the same page. This is notoriously difficult in China, as so many foreign companies know to their cost. Cordiant has invested in a number of manufacturing operations and Creighton observes: “When you put the money in, everyone is in agreement, but when you go back after a year, you see the filtration system has been turned off and they are poisoning the water table.”
For institutional investors, the question of how you approach such investments is dependent first on what their incumbent managers are doing and whether, as Anne-Maree O’Connor, Head of SRI at the New Zealand Superannuation Fund suggests, you need specialists in the field to allocate accordingly. She used the example of the Dutch pension funds who took a thematic approach early on, allocating money towards private and listed equity, driven by sustainable development themes. She observes there is also now a lot of focus on micro-finance as a means of diversification.
O’Connor added that these guidelines are part of the NZ Super Fund’s mandate, “so integrating ESG factors into our investment approach will have a greater positive impact. Our feeling is that if the ESG approach is shown to have a positive impact, it will be integrated into the mainstream market anyway.”
Masahiro Kato, chief manager at Mitsubishi UFJ Trust and Banking in Japan, says clients have shown an awareness of the need to balance return and responsibility. “It doesn’t violate their fiduciary duty. The importance of responsibility to the bottom line is not easy to quantify. O’Connor added, the UN Principles of Responsible Investment (PRI) has certainly extended the trustee mindset. There has been a shift at board level in Australia, for example. But as specialists in the area of responsible investing, we need to work more closely with the investment teams. We have found it easier in the private markets than in the public markets.”
The UN PRI is strengthening its foundation and now has over 400 signatories. But O’Connor says it depends on not just the board and secretariat of the PRI, but also the regional players getting together and developing the main themes: “We need to understand what works in different regions.” Mark Bytheway of the Australian research group SIRIS says, “the UN PRI has inverted the pressure on the asset management community acting as gatekeepers - now the asset owners are playing a greater role.
There is an assumption in some quarters that there is a price to pay for being a responsible investor. But Creighton says this is an ill-informed view. “Why would anyone do that - just to tick a box that says they being considerate? This should not be something people are willing to do because it’s a nice idea. We are looking to increase returns on the basis that ESG is good for the bottom line.”
O’Connor says it is necessary to be an active share-owner to make these considerations part of the mainstream. “Quant managers find it hard to achieve this - the data is not consistent. That is why buy-side analysts and research houses can help, because the data is not well developed yet.”
For some however, the debate about proof that ESG aids the profit motive is outdated. TBLI’s Robert Rubinstein says, “It has nothing to do with proof, and everything to do with belief. Look at CDOs - no one did the due diligence on them but look at the amount of money that’s gone into them.”
Mark Bytheway says, “It’s not about the silver bullet for investing - it’s not helpful that this debate is about out-performance. I don’t know of any other process that has to be subject to such validation. But of course the process does require scrutiny, because consultants have to be able to say to their clients, this process is superior and will generate excess return.”
Anne-Maree O’Connor suggests we have moved forward: “There is an investment belief, however more study is being done to support the belief. Ewoud Goudswaard, general manager of ASN Bank in the Netherlands agrees,: “Without belief, you have nothing. There is no hard figure that ESG produces in terms of performance, but is that important?” Well, to some people, referred to by Robert Rubinstein as “the corporate hard-nosed individuals”, the answer to that question is yes, it is important to demonstrate in pure number terms the benefits of working towards sustainability. That’s the reality
Kato says “We do fundamentally believe that SRI contributes to better performance and will increasing be a consideration when people look at the companies they use. He observes that companies will allocate to SRI as a budget item, but with differing objectives: “It might be to build image or to report on risk management. “However, in the asset management business, a fund manager needs to exercise judgment in the absence of quantitative evidence. Since active managers are used to making qualitative decisions, so the lack of quant data is not critical.”
He acknowledges that it may be difficult to promote SRI and ESG when everyone’s understanding of the concept is different. “Investors do not read corporate social responsibility reports, but does that mean we shouldn’t provide the information? It takes time for these ideas to permeate the mainstream. By meeting the need, we believe the recognition of ESG will improve.
Perhaps we got to the party early, but look at how we have assimilated e-business into the mainstream over the last 10 years. Going forward, if I do not have the ability to say, this is how ESG is integrated into our business, I am not going to be a player.”
Rubinstein mentions Government foundations, NGOs with cash, trade unions and church organizations as groups “you would think of as prime candidates for responsible investing. It should be easy for them to support sustainability, but they are hardest nuts to crack.”
Goudswaard suggests: “Some clients just don’t want to change. We work with one foundation and they said to us, “We don’t want to invest in Shell” on the basis that oil companies are not eco-friendly. That shows us that they don’t want to think through the issue of what they do with their money.”
Anne-Maree O’Connor believes that eventually, investment managers will have to demonstrate that they are integrating ESG processes. “As asset owners understand better what they want, the fund managers will run out of excuses.”
Investors also have to pick up the ball. Godswaard says. “They just don’t want to have their money run in a socially responsible way. One of the best ways to motivate investment boards is to mobilise the members to ask, what are doing with the money we have given you?”
Kato adds, “Iindividuals want to contribute to a better society, but they want returns first and foremost. SRI funds have been available in Japan for 10 years, but we have not been able to convince pension funds yet. We can demonstrate a high correlation between CSR and a higher share price, so it lends itself to a long term approach.
Mizue Tsukushi, president of Japanese firm Good Bankers, says, “The traditional commercial code in Japan, dating back to the 16th century, was that it should be good for the community, good for the country and good for yourself. So Japanese culture ought to be well-disposed to responsible investing. But she says it will take a long time for this way of thinking to establish itself. “People need to realise that the tipping point often comes later than expected. Japanese people are not against the idea of SRI, but they may have become skeptical of us talking about it, because what they see is the system being exploited, for example, by the Yakuza orchestrating filibusters to steer shareholder meetings.”
The catalyst for this debate, TBLI’s Robert Rubinstein, says that with “an unprecedented level of activity and focus on sustainable investment, this is a unique moment that we have now. The new economic model outlined in the accompanying chart “is not possible. Doing more with less should be the new ideal”
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