The Future of ESG Integration Conference Report

Transcription

1 in association with NH Barbizon Place, Amsterdam, Wednesday 11 November Sponsors How institutional asset owners, advisors and fund managers are embedding ESG sustainability in their investments and operations

2 Roderick Munsters Signing up is not a free lunch Robeco chief Munsters warns against watering down UN PRI Roderick Munsters, chief executive officer of Robeco, the Dutch fund manager, has warned that the $18 trillion United Nations Principles for Responsible Investment initiative risks being watered down as it becomes virtually obligatory for the investment industry to sign up. In his keynote address to Responsible-Investor.com s The Future of ESG Integration conference in Amsterdam on November 11, Munsters, former member of the management board and chief investment officer of APG, said: The UN PRI was a wake-up call, but let s be careful not to let it get watered down, He said it had now become almost mandatory for asset managers to become a signatory and queried to what extent are people taking it seriously. Signing up is not a free lunch, he said. He told the 150 conference delegates that the industry s next step would be action on the Principles, not just teaming up. It needs to be more than just a debate - we need to act on issues. Munsters said he saw signing up to the UN PRI as fitting in with Robeco s fiduciary duty to its clients. Munsters said Robeco plans to integrate ESG further into its investment processes and that the firm will make further announcements next year. Failure to integrate ESG will cost your licence to operate in the next 10 years Munsters said. Munsters also called on the asset management industry to take the lead in ESG and and show how we can set an example instead of waiting for government to impose rules on us. On executive pay he called on the sector to to look into the mirror and make what didn t work, work. He lamented the fact that shareholders have almost no say in the US. Part of the problem was that shareholders themselves have differing views.it shouldn t be difficult to get to a common set of principles, he said. Roderick Munsters & Hugh Wheelan page 2

3 Marcel Jeucken PRI to grow staff to 50 and go paid-for Marcel Jeucken, head of responsible investment at PGGM and a board member of the PRI, said the UN PRI was responding to its growing importance by becoming a substantial organisation in its own right. He said there were plans to grow the current staffing levels of the body globally from 20 to 50 staff. The PRI recently kicked off its recruitment drive with plans to hire seven new permanent and temporary staff to guide its recently announced fiveyear expansion programme. The hires, mostly at its London headquarters, include three full time posts: a new business manager/finance director, an assistant manager for training and assessment and a full time manager for the PRI Clearinghouse, the private intranet website which allows investors to collaborate on engaging with companies and lobbying regulators and governments. As a result of the expansion, Jeucken said that a mandatory fee system for members would be introduced from 2011, replacing the current voluntary system. Jeucken talked through the PRI s new five-year plan, which includes the launch of new work streams on alternative assets including hedge funds, infrastructure and commodities as part of a major broadening across asset classes, which started earlier this year with the creation of best practice ESG guidance for investors in private equity. He said the PRI Clearinghouse was also expanding rapidly as a place for investor collaboration on corporate engagement, with around 20 engagements on line at any one time: We need to collaborate with other investors, we can't engage with all those companies ourselves. More to come in ESG research house buy-outs and consolidation Tom Kuh was until recently managing director of KLD, the Boston-based SRI research firm, before it was bought in October by RiskMetrics, the risk, research and proxy voting group. He told the conference that the current wave of consolidation was just beginning: The anticipated consolidation has started. I m here to predict now that the market is reshaping that there s more to come. Kuh said he estimated the value of the ESG research market as 40-50m per annum including services such as research, data and indices: With around 20 firms chasing that amount of business, the sector is fragmented and ripe for consolidation, he said. Kuh said he foresaw the end of a market that had started with owner-led firms into businesses that were more commercial, more focused and more sophisticated. He said the sustainability product palette would broaden out into new areas such as derivatives. He predicted the market could also split between firms that provide just ESG data, others that provide qualitative analysis and specialists in engagement. He noted that from a fiduciary perspective, institutional clients were demanding better data and greater company coverage. Tom Kuh page 3

4 Christina Kussofsky Hillesoy Helena Mahoney Sweden s AP funds cite engagement success Talking on a specific panel about investor engagement, Christina Kussofsky Hillesoy, chair of the ethical council for the Swedish AP government buffer pension funds, said the fund had concluded that collaborative dialogue was the most effective way of being heard. She said the AP funds recent collaboration with APG and the New York City Pension Funds to lobby mining firm Freeport McMoran Copper & Gold on environmental issues, had made the company sit up and take notice after the combined funds corralled more than 30% shareholder support for a resolution to push Freeport to hire an independent environmental consultant: It s an eye-opener for companies when investors from different countries collaborate. It makes companies understand that it is not just a local issue. Kussofsky Hillesoy cited its collaborative lobbying of Sodexo, French facilities management firm, as another very successful engagement. Following the engagement, the company, criticised for inhuman conditions for inmates at a centre for immigrants in the UK, agreed a review of its human rights practices. On the same panel, Helena Mahoney, marketing manager, client services at Hermes, the UK fund manager, which runs a specialist engagement unit, Equity Ownership Services, said the manager had devised a series of milestones across potential lobby areas such as climate change or waste management that enabled it to gauge the success of its engagements. l to r: Erik Breen, Christina Kussofsky Hillesoy & Helena Mahoney page 4

5 Philippe Desfossés Pension funds and ESG Among the asset owners speaking at the conference, Philippe Desfossés, managing director of ERAFP, the Paris-based 6.5bn ($9.5bn) retirement fund for 4.6 million French civil servants which is 100% SRI invested said the fund was launching its own SRI and risk-based index for investing in small and medium sized companies. Desfossés said the index, which will focus on French small and medium sized companies (PME in French), will hold between 60 and 100 stocks. He said the fund aimed to hire a manager to run a mandate against it worth tens of millions of euros per annum. Desfossés said the fund was also aiming to allocate hundreds of millions of euros to sustainable property investments and seed a responsible forestry programme, as it gradually broadens its asset palette away from a bond-heavy structure. Sophie Barbier, senior analyst responsible investment at FRR, the 29bn ($40.5bn) French pensions reserve fund (FRR), told the conference about the fund s research work looking at the potential impact of climate on strategic asset allocation. Barbier said likely direct implications were unlikely to be felt before However, she said the FRR had developed five economic scenarios on climate change to feed into its asset allocation model where the fund felt policy changes could have an indirect impact on its investments. She said the fund was also examining whether it should introduce new climate change-related asset classes, such as carbon funds or forestry mandates. Jeroen Van der Put, director at PNO Media, the 2.5bn pension fund for the Dutch media, said the fund was also weighing up direct investments in the ESG space, notably allocations to microfinance and cleantech. Sophie Barbier Jeroen Van der Put l to r: Philippe Desfossés, Jeroen Van der Put & Alex Van der Velden continued... page 5

6 Pension funds and ESG (cont) On the subject of microfinance, Alex Van der Velden, head of responsible equity strategies at PGGM Investments, which has 200m allocated to the sector with 130m still to invest, said the fund disagreed with some of the recent criticisms about the increased presence of large institutional investors into the asset class. Our view is that there are too many soft core (development/social) investors who ve slowed professionalism and this has actually kept lending rates high. As investors, our long-term view is that we don t want to take action that would ruin our client base. It s a constant balancing act, though. There were critical voices as to the real commitment of institutional investors to ESG and whether a lack of activity in fact breached their fiduciary duty. Carlos Joly, advisor, scientific climate change committee at Natixis Asset Management, said he saw a real mismatch between the trillions of dollars of assets signed up to the UN PRI and what was happening on the ground in terms of RFPs and mandates. Joly argued that pension funds were breaching fiduciary duty in the sense of long-term protection of assets and beneficiaries, by ignoring climate change. The reason, he said, was that investors were waiting for climate change to be factored into equity prices, which he called an impossibility at present. In a keynote address, Stuart Berman, partner at Barroway Topaz Kessler Meltzer & Check, a US class action law firm, suggested that climate change litigation could follow the previous lawsuit route that hit the tobacco industry, and that insurance companies were already considering the issue. Separately, Berman said that failure to collect monies being won in class action lawsuits especially related to the financial crisis might be seen as reneging on fiduciary duty. Alex Van der Velden Stuart Berman l to r: Carlos Joly, Tom Kuh & Michelle Cooksley page 6

7 Henrik Steffensen Andrew Ness The future of ESG? Both Henrik Steffensen, co-founder and vice president of marketing and business development at ASSET4, and Andrew Ness, Investment Director at Scottish Widows Investment Partnership, said they believed corporate responsiveness to ESG issues was being looked at as a proxy for corporate quality. Ness said: We believe sustainability is a good lead indicator for the strength of management. Steffensen cited a recent study by Société Générale, the French bank, which found a correlation between low SRI scores and low p/e ratios at firms. In a summary of the day, Matthew Kiernan, co-founder of Innovest and author of Investing in a Sustainable World, warned however, against the investment industry tail wagging the asset owner dog: Do let us get the investor food chain in order! Kiernan said that investment consultants as a group had previously neglected the ESG space, but that this was changing. He said concerns also remained about the value institutional investors placed on ESG research: I know one Canadian PRI signatory that spends 35 times as much on VaR [value at risk] assessments as on sustainability research, and that didn t seem to do much for them in the financial crisis! One problem is that investors are used to getting research for free. And in a final shot, he warned against pretending that the integration of ESG issues into investment was a panacea to addressing environmental, social and governance concerns: Let s not hurt our own case by exaggerating. Matthew Kiernan l to r: Andrew Ness, Xavier Desmadryl, Henrik Steffensen & Bruno Maradei Let us not hurt our own case by exaggerating continued... page 7

8 Xavier Desmadryl Rhea Hamilton The future of ESG? (cont) Xavier Desmadryl, global head of SRI research at HSBC Asset Management, looked at the growing interest in sustainable investment in emerging markets. UNPRI signatories in developing countries, he said, now numbered 81 and rising, although ESG research, was still scarce, notably in the brokerage/sell-side field. He said: The biggest challenge in emerging markets is a lack of ESG disclosure by corporations, but this is changing also with the growth of sustainability indices and tougher ESG listing requirements in certain markets. Talking about the adoption of ESG standards in the private equity world, Rhea Hamilton, senior investment manager for Robeco SAM Private Equity, said this had been prompted by a mix of pressure from asset owners, employees and trades unions and a reaction by the sector s trade bodies. She said SAM engaged with its own clean tech fund-of-funds managers to ensure they had adopted their own ESG measures. The rationale for investing in clean tech private equity funds, she said, was a combination of rapid population expansion, limited natural resources and ageing infrastructure allied with government stimulus and a need to reduce CO 2 emissions. Do let us get the investor food chain in order page 8

9 Responsible-Investor.com would like to thank all the speakers, sponsors and attendees at the Future of ESG Conference for an excellent event! We look forward to seeing you at the next RI conference. page 9