Roundtable discussion: ESG

Published: July 6, 2015

In June, EMEA Finance held a roundtable on environmental, social and governance (ESG) investment. Topics under discussion included the growing threat of ESG-related risk, how to turn knowledge into an investment tool, and what banks can learn from corporates.

At the table

Stephen Hine
Deputy CEO at EIRIS
Hine has been at EIRIS, an independent ESG research house, since 1989. He is currently in charge of operations and involved with the creation of new products and research. EIRIS has more than 200 clients around the world.

Seb Beloe
Partner, head of Sustainability Research at WHEB Asset Management
Beloe joined specialist sustainability investor WHEB in 2012 as part of the listed equities team. Before that he was head of SRI research at Henderson Global Investors, where he was responsible for the overall direction of thematic research.

Lauren Compere
MD/director of Shareholder Engagement at Boston Common Asset Management
Compere has spent more than 20 years in the responsible investing business. At boutique asset manager Boston Common, she is responsible for client relations and overseeing global shareholder engagement initiatives.

Ritu Kumar
Director, Environment and Social Responsibility at CDC Group plc
Kumar has been with CDC, the UK development finance institution, since February 2014. Before that she was a director and senior advisor on ESG issues with emerging markets private equity firm Actis, which was spun out of CDC in 2004.

Tomas Carruthers
CEO at Social Stock Exchange
The founder of E*TRADE in the UK and of online broker Interactive Investor, Carruthers became CEO of Social Stock Exchange in 2013. The exchange connects impact investors with sustainable businesses.

Naomi English
Executive director ESG client coverage at MSCI
English is on MSCI’s ESG research team, an independent unit. She supports clients on a range of ESG requirements from negative screening and ethical investing through to ESG integration. She’s also head of the team’s screening business.

EMEA Finance: Has there been a big improvement in recent years in the number of corporates, asset managers and asset owners who view ESG positively?

Stephen Hine, EIRIS: I think there has, in part because of the Principles for Responsible Investment (PRI) having galvanised a lot of interest from asset owners, who in turn have put pressure on asset managers to do more in the ESG space. People joining this - I’d hesitate to call it a movement but something like that – now include some large US pension funds along with those from the Nordic countries and the Netherlands, which were already doing it. The challenge really is to determine precisely what ESG integration means and in what context.

The question is, what is the purpose of ESG integration? Is it to ensure that all stocks are properly valued and all companies have a forward-looking business strategy that incorporates ESG factors? I don’t think this is just a science - there’s an element of art to it as well and the extent to which different asset managers are led in different ways. Some come from a values background or believe in sustainability as a core challenge for the planet. Others, equally justifiably, don’t take a normative view on this but see that because things like climate change, bribery and human rights pose a long-term risk to company performance, they need to take an interest in these things as well. And as an asset owner who is investing for the longer term, how do you convince an asset manager to think the same way as you? We are also seeing a lot more engagement by investors with companies to get them to improve not just their policies but their overall performance and the size of their global footprint.

EMEA Finance: How does the ESG integration situation differ in the emerging markets, on both the private equity and listed equity space?

Ritu Kumar, CDC Group: By and large I echo Stephen’s sentiments except I’d add that in the private equity model the rationale for integrating ESG is much stronger – this is true for commercial private equity as well as development finance institutions.

A private equity investor will typically hold an investment for 5-7 years and in many cases have a seat on the board, and so have a greater ability to influence.

In emerging markets, the challenges are much more complex. You have what I call three generational challenges related to ESG issues. There are the traditional issues around conflicts between companies and communities over control of natural resources, for example in extractive industries such as mining, which involve land acquisition and the need to deal with local communities and resettlement issues. As these countries develop they are faced with second generational challenges related to hazards and industrial pollution. Thirdly, many of the faster developing economies confront issues related to products and services such as auto pollution norms, congestion, and pesticide residues in the food chain. Over and above this there is a lack of proper enforcement of legislation – sometimes the legislation doesn’t exist.

I believe an investor in emerging markets needs to address far more challenges than in developed markets and therefore must be more vigilant - so i’d say the rationale for ESG integration is much stronger.

Lauren Compere, Boston Common Asset Management: If you are looking at the continuum of ESG, in developed markets it’s currently used mainly as a risk mitigation or risk management tool. What we are trying to do in emerging markets is really look at the E, S and G as positives – you are willing to pay a premium for good governance – and that’s a big distinction. That also means understanding management, looking not only at how founders but also executives of companies are looking at ESG issues, and that means getting on a plane or meeting with management in our own offices. The strategies of ESG issues really do differ depending on whether you are looking at developed or emerging. EMEA Finance: Is the interest being shown in ESG integration by asset managers being translated into concrete actions?

Seb Beloe, WHEB: I was at a conference last week and there was someone there from a very large UK local authority pension fund. He was asked if, as an asset owner, he was seeing the market respond to his interest in ESG issues. He replied that he felt pretty much any major asset manager could be on the panel with him and field somebody who could talk eloquently around ESG but the number who could field a fund manager who was actually managing money and could talk convincingly about it was much less. He said that at a multinational level almost everyone recognises that you have to be able to talk about ESG, but when it comes down to the individuals making decisions, there are vast swathes of the City that just don’t see it as added value.

Unfortunately, I think that’s still true. People are more interested in the risk side of things, seeing it as a risk management tool. If you think about corporates and how they come at this, they are typically 10 years ahead of the City. In the late 90’s it was about risk – if you’re Nike, how do you develop a framework to ensure you’re not on the front page of the Financial Times for employing children? Today, if you talk to Nike about this sort of stuff, it’s all about innovation, product development and the value-add that ESG brings in making a better, more resilient business. The financial community isn’t yet really part of that conversation.

Lauren Compere, Boston Common Asset Management: And that’s made it a challenge for us in many ways. As we talk about the mainstreaming of ESG - and we are really happy that’s happening and are fully supporting it - it’s made it more difficult for niche players to illustrate, in a proof statement, their ESG integration. We are constantly having to innovate and demonstrate how we are doing ESG integration to the point where we are having conversations in the US about how to demonstrate impact in public equities engagement.

Seb Beloe, WHEB: I think you have to view it as a very healthy development – the pressure is being raised and it requires you to be able to demonstrate and prove impact, and that comes into some of the stuff MSCI is doing around measurement and reporting.

Ritu Kumar, CDC Group: We see the fact that the corporates are much further up the scale than investors very clearly in both our businesses - the fund-of-funds business and direct equity investment. Many of the fund managers we invest in may need convincing about this whereas the companies that we invest in directly get it right away because they see it can create value for their company.

Stephen Hine, EIRIS: And that creates a challenge in itself, if the City is behind where many corporates are. A company like Unilever might come along and say they want to double their size but not grow their footprint, or whatever the terms might be. They might not want to do quarterly reporting but get lots of pressure and pushback. In the end, if the company can’t demonstrate its ongoing quarterly or half yearly performance, everyone [in the City] might say “maybe you are spending too much time on the ESG side of things?” That sort of company may well be large enough to prove a positive case. It’s all the more important that these businesses demonstrate to their investors – particularly the mainstream ones who need convincing – of why these ESG policies are a good thing.

It should be intuitive - relatively obvious things like saving water for a brewery, with SAB Miller being a good example. But we’ll be at conferences with a load of convinced people while across the road are tens of thousands in the City who don’t understand it at all. It shouldn’t be perceived as a regulatory thing coming from government; it needs to be something coming from the investment community itself, which is why the asset owner role is very important.

Tomas Carruthers, Social Stock Exchange: I agree. I think that asset managers, with a few exceptions including those that are present, have responded poorly to integrating ESG and even between the E the S and the G there are different levels of adoption.

EMEA Finance: Why do the three components of ESG receive different levels of attention?

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