Mainstream looks deeper at SRI
Business for Social Responsibility (BSR), which has been providing socially responsible business solutions to 250 of the world’s leading corporations since 1992, recently published an insightful report, “Environmental, Social, and Governance: Moving to Mainstream Investing?” The report is unique, as it is largely based on the views of more mainstream financial institutions rather than the usual SRI suspects. Wells Fargo, Goldman Sachs, and Standard & Poor’s joined Al Gore’s firm, Generation Investment Management, two academic scholars, and two SRI researchers to create the report, designed to help mainstream financial advisors to incorporate environmental, social, and governance (ESG) factors into their analyses.
See all BSR reports on global social responsibility trends, including this one and more recent reports through 2010.
The report notes that “Although many studies show a positive association between investors’ use of ESG criteria and enhanced financial performance, the data is still inconclusive, and mainstream investors remain skeptical.” It identifies key barriers to the more widespread use of ESG criteria by companies and investors and suggests possible solutions for breaking down the barriers.
The first barrier to wider integration of ESG factors is inherent in the recent emergence of ESG considerations: the lack of information on the long-term effects of ESG on the financial returns of companies. One start in this direction is Goldman-Sachs’ “GS Sustain Focus List,” which evaluates how well companies integrate ESG criteria into their businesses; tellingly, the companies that meet their criteria have outperformed the world stock index MSCI by 25 percent since August 2005.
Since much ESG data is either self-reported or simply not gathered, another barrier to integrating ESG criteria into mainstream investing is the availability, accuracy, and standardization of company ESG data. Although more companies are publishing corporate social responsibility (CSR) and sustainability reports, the information varies widely and can be self-serving. The report urges wider use of existing reporting standards, such as the Global Reporting Initiative; governmental regulations on CSR reporting and mandatory ESG reporting by companies could also help address this barrier.
The third barrier is that the focus on short-term investment outcomes conflicts with the long-term approach to ecosystem and social health that robust ESG policies are meant to foster. ESG policies can include internal workplace, management, and leadership policies and practices, or relate to community and nation-state relations or the overall ecological footprint of operations. These policies would take time to reveal their significance, so it isn’t easy to compare their impact to quarterly earnings reports or changes in stock value—we will need to be looking for the effects of ESG factors over the course of years. In addition, studies of performance thus far have been too new to measure long-term results, and it is difficult to simply correlate stock price increases to the specific adoption of ESG practices, as there are many factors that contribute to investor support for a company.
The fourth barrier to change is the investment profession, whose representatives know very little about how to analyze ESG practices, or how that relates to the traditional fiscal research they are accustomed to analyzing. This can be changed through education and professional development, which is expanding in the area of ESG training, but it too will take time. Purchasing social research services from longtime SRI providers would accelerate this process. Finally, the mindset of mainstream investors, especially the mythology of sacrificing profitability through consideration of non-financial factors, affects the adoption of ESG factors into investment mainstream. The steady increase of data on the impact of ESG on the bottom line should persuade detractors in the years to come, as more companies show a positive correlation.
United Nations Update (see earlier NI Blog post on the founding of the UN PRI)
The Principles of Responsible Investing (PRI) provide a framework for incorporating ESG issues into the investment philosophies and ownership practices of asset owners and investment managers. The PRI was formally launched by Kofi Annan in 2006 and since then at least 380 institutional investors and investment managers with more than $15 trillion in assets have signed the PRI.
The PRI Report on Progress 2008 indicates that:
- 32% of respondents said they would now revisit relationships with service providers in light of ESG issue-related capabilities, which reflects a 68% in- crease in the number of signatories willing to do this since the previous year. That more firms are willing to consider changing or even terminating corporate relationships due to ESG criteria reflects the importance of such criteria.
- 76% of signatories report engagement in dialogue with policy makers and industry regulators on ESG issues, a 29% increase compared to last year. Dialogue has long been regarded as the most impactful strategy in the SRI industry, but it has often occurred outside the regulatory environment. The scandals of the recent past, combined with the failure of some of the nation’s largest financial firms, suggests the need for greater regulatory oversight, particularly of lending practices.
- 80% of signatories ask companies to produce standardized reporting on their environmental, social or governance policies, practices or performance. Someday there may be a common for- mat for such policy reporting, but until then, the key is to at least get companies into the habit of producing them.
To see which companies worldwide have become signatories of the PRI, visit www.unpri.org/signatories.
UPDATE: April 2009
Private Equity Gets Responsible!
The United Nations’ Principles of Responsible Investment program, which now represents $18 trillion in assets and over 450 signatories, announced in February 2009 that it has helped the Private Equity Council of the nation’s 13 largest private equity firms—including Carlyle Group, Blackstone Group, and Kohl- berg Kravis Roberts & Co—to adopt a set of comprehensive responsible investment guidelines. The guidelines, which the equity firms will affirm be- fore investing and monitor during their period of ownership, cover environ- mental, health, safety, labor, governance, and social issues, and address international human rights conventions, anti-bribery provisions, Board conflict of interest issues, and responsiveness to communities and employees in addition to shareholders. President Douglas Lowenstein said, “Private equity is all about investing for growth and maximizing returns to our investors. To accomplish that today requires considering a range of environmental, governance, human capital, and social issues”. If you notice the language of this statement, he didn’t say ESG (environmental, social, and governance) factors are useful or recommended, he said considering ESG factors is required. Amazing!
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