It's a matter of principles
An obvious contributor to the debate on how environmental, social and governance (ESG) issues should be incorporated into investment policy is the United Nations (UN), or more precisely the United Nations Environment Programme (UNEP). The global factor - reach, consistency and influence - is what makes it so obvious.
UNEPFI - the programme’s finance initiative - met with representatives of the international pension fund industry last year. “The conclusion of the meeting was that we need a global platform on which to build a set of principles that will have consistency worldwide,” says Nick Fitzpatrick, co-chair of the UNEPFI PRI Expert Group. The expert group consists of 60 senior
executives who are experts in environmental and social factors and in governance, and among them are investment managers, investment consultants and fiduciaries.
With its principles of responsible investment (PRI), UNEPFI envisages a global platform consisting of a high-level set of principles backed up by examples of how they should be implemented. “There needs to be a commonality of the overarching principles which can be accepted across the globe,” says Fitzpatrick.
He adds: “We are not trying to put together an agenda for one particular economic group.” In response to the question, do you feel that some agencies do have this kind of agenda, he says: “We are putting together a neutral platform with a global reach. There is no point in a group from Europe, say, trying to impose its own views on the subject on the rest of the world.”
He explains that the principles focus on the idea that the profit motive should not overwhelm the broader considerations. “We need to decide how much a focus on the maximisation of immediate investment returns to the exclusion of social and environmental considerations will damage the portfolio in the long term.”
It is clear that much work has been done in the creation of ESG guidelines and principles. Will UNEP acknowledge this in its deliberations? “I believe we are drawing on a body of knowledge created already,” says Fitzpatrick. “It is inclusive and co-operative. I do not get the sense that we are competing with anyone; in fact we are trying to build on what has been done before and broaden the impact.”
He explains that the impact will be felt most by those that operate globally. “The funds of major multinationals investing internationally will want global alignment on these issues,” he says. “Implementation of the principles across the countries in which they operate will be helped if there is a UN endorsement.”
Geographically the main representation comes from Europe, north America and Australasia, although participation from all key parties is yet to be assured. “I hope the EU will be included in the process,” Fitzpatrick notes.
He adds: “The Thai and Malaysian Government Pension Funds will be joining us but there is still need for more representatives from Asia but we are working on it. There is no point binding one half of the world and letting the other half walk free. The position would be strengthened if Asia were included.” The inclusion of Thailand and Malaysia is encouraging, but with Asia likely to play a significant - if not leading - role in the world economy during the 21st century and beyond, a more substantial representation in this project would seem appropriate, to put it mildly.
The challenge in securing worldwide endorsement is that different countries’ financial systems are at different stages of development. “But we aim to set the tone so that they know what to do when they do get to that stage,” says Fitzpatrick. “Furthermore we may help the under developed countries whose financial systems are still young. The PRI will help them avoid the mistakes that have been made elsewhere.”
The experts on various issues are in discussion with investors to reach a consensus on the principles. “There was a meeting in April and the outcome was very coherent and positive,” says Fitzpatrick. “I am very encouraged by the fact that there has not been much conflict among the members. The UNEP initiative has been enthusiastically embraced.”
As with any project of this kind, the challenge is in overcoming cultural differences. “Within Europe it is very difficult to get agreement, especially on areas of corporate governance,” says Fitzpatrick. “Furthermore Europe holds the view more readily than in the US that companies should have a wider - social and environmental - responsibility. We have to get agreement across different cultures.”
The first meeting of the expert group was held in April. “We expect to produce a summary report of the findings by the end of October and a manual for policymakers will be published in February,” says Fitzpatrick. “This will show best practice of how environmental and social factors can be incorporated in long-term decision making. And then they will have to be accepted by the investment community.”