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Special Report

Impact investing


ESG alphabet soup

The plethora of ESG programmes and plans has resulted in a confusing alphabet soup. Nina Röhrbein sought industry views

In the absence of heavy regulation, environmental, social and governance (ESG) initiatives and codes of conduct appear to have multiplied over the last decade. The main reason for the proliferation is their diversity, say industry participants. While they may overlap in some areas, they essentially cover different issues or regions, and have a narrower or broader focus.

“Different initiatives focus on different issues and some, like the carbon disclosure project (CDP), have very small, specific missions,” says Emma Hunt, principal at Mercer. “They could be made part of initiatives with wider remits but by keeping the CDP separate and focused they are more effective. The number of initiatives can be confusing but their focus on one particular target helps the various investment players concentrate on the groups they try to work with, such as companies or sectors.”

Mercer has compiled a list of relevant initiatives for its clients with details of their membership, targets and how much input and resources they require. Some only ask for minimal support, while others require more time-consuming participation. “The CDP requires only nominal support and is very popular with pension funds that want to send signals but may not have the resources to do too much in-house,” says Hunt. “The UN PRI, however, requires slightly more of a commitment from signatories in terms of resources but is still not extensive. The resources required for UN PRI participation do not seem to put investors off because they fundamentally agree with the principles and, importantly, the process behind it.”

However, too many initiatives risk, creating confusion and fatigue, admits Paul Simpson, chief operating officer at the CDP. “But as long as there is real differentiation between initiatives, and the value they deliver is communicated clearly, there should not be a problem,” he says. “Certainly, in terms of the UN PRI, the Institutional Investor’s Group on Climate Change (IIGCC), the Forest Footprint Disclosure project (FFD) and CDP we work closely together and this is beneficial for all involved, while at the same time remaining separate initiatives with different structures.”

However, the number of initiatives begs the question of whether legislation would not be a better solution.

“Any proposed change to legislation needs to be broadly applicable and so will focus on the lowest common denominator,” says Paolo Sardi, CEO of ECPI, a European provider of sustainability research and indices. “As a result legislation will always be a little bit behind the most innovative ESG solutions. Existing sustainability laws are more concerned with disclosure requirements than ESG investment as a whole.” He, like many others, prefers self-regulation.

Simpson believes governments need to adopt more climate change regulation. The CDP is currently working together with the UK and US governments to help them adopt mandatory reporting requirements. “Governments tend to only act when there is enough will from the business investment community or the electorate,” he says. “They often only regulate after issues have been proven the voluntary way.”

The UK’s Universities Superannuation Scheme (USS) has signed up to the CDP, the Global Investor Governance Network (GIGN), the ICGN, the IIGCC, PharmaFutures and the UN PRI. “The reason we have signed up to these is because we believe that working in collaboration is far more effective in addressing issues than it is for USS to act alone,” says David Russell, co-head of responsible investment at USS. “We invest our £24bn (€28.4bn) of assets in a broad set of asset types and in over 2,000 companies globally. Therefore, by working through collaborations we can leverage many of the activities that other funds do in the same space. Most initiatives help us generate better performance or better risk management based on the assets in which we invest.”

Dutch pension administrator and asset management company APG is a signatory to the UN PRI, and a member of the IIGCC and the CDP.

“One of the main things we are currently doing through IIGCC is policy work in the run-up to the UN Climate Change Summit in Copenhagen in December, which is going to decide the future of international climate policy after 2012, when the Kyoto Protocol expires,” says Rob Lake, head of sustainability at APG Investments. “We have been heavily involved in this because we are already big investors in areas such as renewable energy and the wrong kind of international climate change policy decision could undermine the value of our existing investments.”

USS has also signed up to the Asian Social Responsible Investment Association (ASRIA) and the Hong Kong-based Asian Corporate Governance Association (ACGA) because it wants to improve its responsible investment activities in Asia. It has similar relationships in Australia and the US.

But the implementation of various guidelines can be difficult, particularly for more traditional investors, and requires some efforts over a given time period, says Sardi.

ESG was already embedded in the core of APG Investments long before the latest initiatives sprang up. “We would want to integrate ESG in our portfolios of asset classes even without the PRI,” explains Lake. “We would not spend any time on these initiatives unless we thought it was time well spent but working in a network inevitably takes a bit of time.”

Initiatives are open to all types of investors. However, large investors seem to feature more prominently on signatories’ lists.

Hunt puts that down to their larger internal resources. She adds that small and medium-sized pension funds can still communicate their investment principles to their fund managers as part of their own due diligence process without needing to join an initiative. “Free riding by all sizes of investors does go on though and it is an issue which frustrates some of the more active investors,” she says.

But Lake points to the relatively large number of smaller investors in the UN PRI. “The PRI has its own specialist small funds working group because these funds have particular needs and interests that are not the same as those of an institution like APG,” he says.

There is no set format to judge whether an initiative has been successful.

“To measure the success of an initiative you have to look beyond the number of investor signatories,” says Jane Goodland, investment consultant at Watson Wyatt. “Each and every initiative needs to be measured in terms of its own goals, which it sets out to achieve initially.”

However, the CDP is one of the few that can be measured in numbers. Aside from its tenfold increase in investor signatories between 2002 and 2009, companies reporting to the CDP also rocketed - from 245 in 2003 to 2,200 in 2009.

“On top of that, more than half of the global top 500 companies had an emissions reduction target in 2008, compared to less than 5% of them in 2003,” says Simpson.


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