Former US vice-president and passionate environmental campaigner Al Gore argued at the PRI in Person conference in San Francisco that climate change poses an existential threat to the global economy and civilisation. In a keynote address to a hall packed with 1200 delegates, Gore, who founded Generation Investment Management in 2004, urged investors to act on climate change or they would dismally fail future generations.

Gore opened his rallying call referencing the violent storms set to pound different regions of the world. Forecast hurricanes in the south-eastern US, south-east China and Hawaii are “no coincidence”, he said. “While oceans are out of sight and mind, they are a key driving force in altering the climate on which we depend.”

He also noted a new development, wherein hurricanes are now predicted to remain in place for several days, replenishing their moisture because of new patterns in the redistribution of heat from tropics to poles.

“Wind patterns are becoming loopier and more disorganised and this doesn’t always move systems along as we have grown used to.”

Optimism

Despite his dire predictions and lamenting the absence of any US political will to help solve the problem, Gore finds signs of hope. He observed that people are “joining the dots” on their own. He is also encouraged by states such as California, the world’s fifth-biggest economy, leading the way on tackling climate change with recent pledges like plans to derive all energy from renewable sources by 2045.

“The record shows California is capable of astonishing progress when it sets a course,” he said.

Initiatives in other US cities and states, and the hundreds of companies committing to using renewable energy, are also encouraging.

“The idea that the environment and the economy are in conflict is false,” Gore said. “Decarbonising goes hand in hand with improved economic performance.”

He cited the recent announcement by tech giant Apple that it will derive 100 per cent of its energy from renewable sources. He also noted that new jobs are flowing into the renewables sector faster than into traditional industries; there are five times more jobs in solar installation than in coal, he said. He also praised the role of artificial intelligence in reducing electricity usage and told investors that climate change is the “biggest investment opportunity in the history of the world”.

 

In line with fiduciary responsibility

Gore also told delegates that acting on climate change is in line with fiduciary responsibility. He said it was now clear from economic research and real-time performance that integrating ESG is best practice and does not violate fiduciary responsibility.

Despite US President Donald Trump’s decision to take the US out of the Paris climate agreement, Gore offered hope that America might not withdraw if a new President is elected in 2020. Under the law, the first day America could withdraw from the Paris agreement is, coincidentally, the day after the next US presidential election, he said.

“The missing ingredient is political will, and political will is, itself, a renewable resource,” he said.

Gore also noted encouraging policy shifts in Europe, China and Brazil, citing the European Commission’s consideration of whether to clarify that institutional investors’ duties include considering sustainability risks. He said electricity from renewables would become increasingly cheaper and noted that as episodes of zero-cost energy increased in regions such as California, Germany and Australia, it would become easier for countries to raise their ambition and make more impressive commitments.

Gore compared the investors and companies exposed to the fossil fuels that won’t ever be extracted because of the need to limit global warming. In 2008, bankers sold mortgages to people who couldn’t afford to pay them, mitigated the risk by attaching “phony insurance”, and sold the mortgages on into market, he said.

“If fossil fuels can’t be put to use, at some point investors will recognise, as they did with subprime, that they are worthless.”

Gore ended with a message of hope that although human nature makes us vulnerable, wisdom leads us. He urged investors to identify businesses that provide goods and services that are safe for society, to take “hard steps” to begin integrating sustainability into their investment process, and to educate their teams. He told investors to engage with policymakers and companies, push corporations to disclose, and use tools like the Sustainable Development Goals (SDGs) to guide strategy.

Although investors face gaps in corporate reporting, and the policy environment is immature and skewed, he said, investors can “do their part” and work on their own, and with others, forming a community of people working in same direction.

“If we step up we can prevail,” he said.

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Increasing memberships in Latin America and the Middle East, ensure signatories embark on a real and ongoing integration ESG principles, and doing more to put the ‘S’ in ESG are just some of the current initiatives for the world’s leading proponent of responsible investment, the PRI. The UN-backed organisation, established in 2006, counts more than 1800 global asset owners, managers and consultants as signatories, committed to its six principles designed to integrate ESG considerations into investment practice. With a combined $70 trillion under management, PRI signatories have the influence to create real change within the companies and markets they invest – something the PRI will stress at its PRI in Person conference in San Francisco this week.

The conference will feature a keynote address from former US vice-president Al Gore, a speech from California State Treasurer John Chiang, and an interview with Unilever chief executive Paul Polman. This year’s wide-ranging program spans the importance of diversity, corporate tax transparency, how investors can help tackle modern slavery and labour issues, and the new technology that is changing ESG.

Encouraging investors to act on climate change and identifying new low-carbon investment opportunities remain overarching themes, and the conference marks the formal launch of the Investor Agenda, developed by the PRI and partner organisations such as Ceres and CDP to accelerate action on achieving the goals of the Paris Agreement.

It’s a challenging message to get across against a backdrop of recovering energy prices that will, for the first time in a while, test investors’ commitment to not investing in fossil fuels and helping combat climate change.

For PRI chief executive Fiona Reynolds, the move away from fossil fuels is inevitable and holding energy assets is the real risk.

“Investors need to address the issue of capital re-allocation to avoid stranded assets and to protect their portfolio returns,” Reynolds says. “Rather than invest in fossil fuels, investors should seek new investment opportunities in clean technologies and renewables.”

It’s a message the PRI will push with a new piece of research, to be unveiled at the conference. The Inevitable Policy Response (IPR) argues that policy changes make fossil fuel investment highly risky. Unless investors and governments take much stronger action on climate change now, the argument goes, governments will be forced to implement harsh and sweeping measures to limit global emissions in a way that could create disruption in capital markets.

Nor, Reynolds says, has the organisation’s momentum been dented by US President Donald Trump’s decision to take the US out of the Paris agreement. In fact, she says, it has done the opposite.

“Ironically, President Trump pulling out of Paris has actually galvanised many investors to re-commit to action on climate,” she says. “We see this through our own US investor base and in movements such as the US-based ‘We are Still In’ coalition.”

The conference is also an opportunity to mark progress on challenges that have come from within the organisation. The PRI has come under fire for not pushing signatories, particularly asset managers, hard enough on ESG.

“We have long been aware of the fact that many investment managers were using the PRI as a sort of kitemark, something they signed in order to win mandates but without any real commitment,” Reynolds says. To address this, she points to the introduction of new accountability measures that ensure potential signatories are “keenly aware” that joining the PRI isn’t a “free ride but entails real work and ongoing commitment”.

Carrot and stick

The PRI has put about 174 of its signatories on a watchlist for failing to demonstrate a minimum standard of responsible investment activity. In the same way that proactive asset owners cajole investee companies on ESG, the PRI is now engaging with its own members to improve on ESG or risk being thrown out of the organisation.

“They have responded positively, and we will work with them over the next two years to help improve their performance,” Reynolds says.

The PRI has also produced an asset owner manager selection guide to help investors ensure that the managers they appoint share their ESG vision but methods involve carrot along with stick. The organisation has introduced a leaders’ board to recognise good practices on ESG integration and sustainability and a new awards program for outstanding individual projects by investors.

“These measures will hopefully encourage all investors to look more closely at their own performances and want to be part of the ESG success story,” Reynolds says.

Membership surge in Asia

PRI membership has grown fastest in Asia in recent months; US membership has also grown, enthuses Reynolds. Now her focus is on the Middle East and Latin America where the PRI recently appointed a Columbia-based chief to promote growth in the region. Two new reports in association with the CFA Institute will explore the barriers to ESG integration in equities and fixed income in the Americas, and one panel session at the conference focuses on the risks and opportunities of responsible investment in Latin America.

Reynolds cites different ESG issues moving up the agenda, such as cybersecurity and changes in the labour force due to technological disruption and the transition away from fossil fuels. This year’s conference will also include a session on asset owners’ role in tackling the changing face of labour across different markets, sectors and asset classes.

Reynolds is also determined to focus more on the ‘S’, for social, in ESG.

“S issues often get short shrift in ESG discussions,” she says. To improve on this, the PRI will release a new report on how investors can tackle income inequality, something Reynolds says she has wanted to examine more closely for a long time.

“We are very encouraged by the progress we continue to see by asset owners, though a great deal of work remains to be done,” she says.

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Equities continue to represent the key driver of returns for many asset owners, with the average allocation to equities across the seven largest global pension markets in 2017 coming in at about 46 per cent.

Public equities have, of course, delivered robust returns in the post-GFC period, underpinned by the extraordinary scale of monetary policy support. In light of this, it is understandable that potentially far-reaching structural changes occurring in public equity and private capital markets have garnered less attention than merited.

The increasingly blurred line between private and public equity markets poses challenges for those institutions that continue to rely on public equities as the growth engine of portfolio returns.

IPO market evolution

Many will be familiar with the various statistics highlighting the changed nature of public equity markets in most developed economies, some of these include:

  • The number of US listed companies has halved since its 1996 peak
  • The average US public company is 50 per cent older and four times larger than 20 years ago
  • Developed market net equity issuance is at historically low levels

While in 2018 we have witnessed an uptick in the number of US IPOs, the broader picture continues to be that of a significantly diminished flow of new equity issuers.

Indeed it has become increasingly rare to see IPOs of scale from beyond the portfolios of financial sponsors. The declining issuer flow has been variously attributed to factors such as the strength of M&A activity, investor short-termism and increasing economies of scale to being listed.

No matter the causes, the view that the “public market is quickly becoming a holding pen for massive sleepy corporations” expressed by Duke associate law professor Elisabeth de Fontenay appears to have increasing validity. In parallel with this development, private capital markets have witnessed explosive growth in the last decade.

Private capital

This growth has been driven primarily by demand from technology-focused companies. Capital raised by US tech venture and growth investors has grown 25 per cent, year on year, since 2009.

There are now estimated to be 263 ‘Unicorns’ globally and at least 30 of these have valuations in excess of $5 billion. With venture-capital investment inherently difficult to scale, the categories of investors active in latter-stage direct private capital investment has grown markedly in recent years. Long-established crossover investors, such as Fidelity and T Rowe Price, have been joined by others like Baillie Gifford, and by strategics such as Google, Intel and Samsung.

Implications of these structural changes

There are a number of implications that follow from the observed shift in value creation from public markets. These include:

  • Late-stage private capital markets in the US, and increasingly in Europe, resemble the heyday of the IPO market in the 1990s. The use of the IPO as a strategic lever to accelerate growth has become ever less common, with a listing of shares viewed by vendors and management teams primarily through a liquidity lens. Even if many high-growth private companies ultimately go public, this may only further spotlight the value capture question for those without adequate earlier-stage exposure.
  • There are increased concerns about the diversification and growth properties of public-equity markets. Recent research prepared for the Norwegian sovereign wealth fund highlighted how the concentration risks for public market investors are rising rapidly, with many indices representing sectoral bets rather than exposure to the famed market portfolio. Meanwhile, private company investment is becoming ever more essential to the effective execution of thematic investment strategies as asset owners seek concentrated exposure to secular trends such as demographics, disintermediation and displacement.
  • There are growing risks that the value of existing public equity portfolios will be adversely affected by the exponential growth in the size and capabilities of global private companies.

 

Asset owner response

While asset owners have been responding to these changes through increased allocations to private equity, buy-outs dominate the asset class. Preqin data shows that buy-outs accounted for more than 60 per cent of total private equity fund raising in the 2012-17 period, with 75 per cent of this flowing to large company buyouts.

While such allocations have a sound investment rationale, they do little to address the issue of private company value capture. Indeed, the creation of the Softbank-sponsored, $100 billion Vision Fund could be characterised as a response to this, as it seeks to take advantage of an absence of large global private capital providers.

A number of the largest global asset owners have reacted by increasing their latter-stage direct investments in high-growth private companies, with some going as far as establishing offices on the West Coast of the US to aid in sourcing opportunities.

It is particularly noteworthy that the California Public Employees’ Retirement System is considering the establishment of a direct investment program, which would include investment in promising companies in sectors such as life sciences, healthcare and biotechnology.

While latter-stage direct investment evidently presents risks and challenges, these can be overstated, given commercial validation is typically well established. Additionally, investments are de-risked through the use of contractual protections such as liquidation preference, anti-dilution and enhanced governance rights. As companies stay private for longer, necessitating greater equity rounds, governance and investor relations are becoming increasingly sophisticated and in many cases comparable to public market best practice. Finally, exit markets continue to be in rude health, with strategic acquisitions rewarded by public market shareholders.

It is evident that developed-world public markets are struggling to maintain their historic role in providing access to high-growth companies. This has implications for asset owners and may increasingly necessitate evaluating equity exposures on a more integrated public and private portfolio basis. However, this changing equity landscape is also creating opportunity. With private companies increasingly seeking long-term investors, asset owners globally are uniquely positioned to provide strategic equity investment, enabling greater capture of the unprecedented levels of private company value creation.

 

David Linehan has been senior investment manager at the Ireland Strategic Investment Fund (ISIF) since 2012. He recently left to join the private markets team of a London-based pension fund.

 

The Australian industry superannuation fund for hospitality workers, Hostplus has every reason to celebrate. Not only did it turn 30 this year and hit $25 billion in funds under management, it also topped two of the most influential league tables in Australia’s retirement savings sector.

But Sam Sicilia, who became the fund’s first and only chief investment officer just over 10 years ago, says there is little time for self-congratulation. He says managing the pension pots of 1.1 million Australians is something the fund isn’t “flippant about”.

“It’s a nice position to be in but let me be clear – you can stuff it up,” Sicilia says. “Every investment decision has to be made appropriately, because it can cause adverse returns if it’s not done properly.

“You can’t have hubris and you can’t get smug and say, ‘We’re the number one fund, we’re unbeatable.’ We have no such language here. The markets have a way of humbling everybody, so the investment results here are celebrated for 2.5 minutes.”

SuperRatings data released in July showed that Hostplus’s balanced option – where 90 per cent of its members have their savings – was the best-performing in Australian superannuation for 2017-18, returning 12.5 per cent. Another key ratings company, Chant West, also had Hostplus in first place. Both Chant West and SuperRatings put the median return for balanced options at about 9.2 per cent.

In the long term, Hostplus is also a standout performer; SuperRatings has it atop league tables over three, five, seven and 15 years.

At the end of July this year, the board of Hostplus affirmed its annual strategic asset allocation (SAA), making no “significant changes”, says Sicilia, whose prior roles include director of investment consulting at Russell Investments.

The Hostplus board meets seven times a year, with discussions about investments generally taking up the morning session. While all of the fund’s money is managed externally, Sicilia heads up a six-person investment team encompassing strategy, equities and governance, property, private equity, and debt and alternatives.

The fund now has a 50 per cent investment in listed equities, including Australian and international shares and emerging markets, plus a 40 per cent allocation to unlisted assets and 10 per cent in alternative liquid defensives.

“We have a zero allocation to fixed interest and a zero allocation to cash,” Sicilia says.

He adds that “our growing allocation to alternatives is to ensure we remain flexible and adaptive, given we have such a high allocation to unlisted assets”.

Secret to success

Many industry watchers attribute Hostplus’ success to its ability to invest in unlisted infrastructure and its increasing addition of venture capital (VC) to the mix.

Infrastructure sits in Hostplus’s unlisted bucket, with an allocation of 12 per cent, alongside property with a 13 per cent allocation, private equity with 7 per cent, and credit, which also garners a 7 per cent allocation.

“For us, having that strong cash flow, [about $7 billion worth of inflows a year], disposable cash if you like, means we can take advantage of not just opportunities that arise, but each opportunity that arises,” Sicilia says. “If I were the CIO of another fund, where the outflows were around the same as the inflows, I would be having a very different conversation with you.”

Hostplus made small allocations to infrastructure in 2000 and VC in 2001, becoming an early adopter of the strategy while still a fund worth less than $2 billion.

It initially invested via collective vehicles such as IFM Investors. Fast-forward to 2018 and Hostplus has grown to become the biggest VC investor in the country.

It has stakes in myriad big-name projects, including airports in Adelaide, Alice Springs, Brisbane, Darwin, Melbourne, Perth and Tennant Creek, and seaports all along the East Coast. Additionally, it has stakes in toll roads, railway stations, renewable energy assets, gas, electricity generation and transmission lines around the world.

“Infrastructure assets are large and chunky, so none of us can afford the concentration risk of buying a single asset and being the operator of a single asset,” Sicilia says.

The vast majority of the fund’s 1.1 million members work in the hospitality, tourism, recreation and sport industries. Their average age is 34, which allows Hostplus the luxury of investing in highly illiquid assets.

“They are not retiring anytime soon, so there is a long investment horizon,” Sicilia says. “The fund itself never gets older. Why? Because the hospitality industry is always a young person’s game.

“There is a net benefit to members [of VC investment] but there is another important reason. If we can build a VC ecosystem in this country, it keeps jobs, businesses and intellectual property here in Australia, rather than forcing it offshore, so the jobs stay here and we build an industry in this country, which is critical if we are going to be a part of a technological future.”

Sicilia says infrastructure and VC investments are “critically important to the fund”.

“The assets themselves are very long-term assets,” he says. “They have growth characteristics but, in particular, they also have defensive characteristics. They generate income, which is defensive, and capital gains, which is growth. When equity markets are volatile, our unlisted assets – such as real estate and infrastructure – provide downside protection. That is critical.

“If you say, ‘How come everybody doesn’t do that?’ Well, you need to tolerate illiquidity. I’m pretty happy with the characteristics.”

Long-term relationships

Diversification and holding onto investments and managers for the long term are other key components of Hostplus’s strategy.

“Diversification matters a lot – and not just at the asset-class level, but at the manager level as well,” Sicilia says.

All of Hostplus’s assets are managed externally, by 64 managers, across 162 mandates, and it has used JANA as its asset consultant since 2002.

“The way I could describe Hostplus and the investment beliefs of the board is that we are not a hire-and-fire investor,” Sicilia says. “The fund was $7.4 billion when I started, and I think I can count the number of managers we have terminated on one finger.”

As of August 2018, Hostplus has relationships that span more than 10 years with 30 managers. Names include Bridgewater on an alternatives mandate, Baillie Gifford for international shares and Greencape Capital for Australian equities. Sicilia says the fund doesn’t choose managers based on performance, telling Investment Magazine“market timing is a loser’s game”.

Instead, Hostplus places emphasis on the skills of portfolio managers, so the departure of a star manager or a change in strategy are the most common reasons it would terminate a mandate.

“If you buy a manager on performance, which we never do, then clearly when performance is weak, you want to terminate them…[that describes] the people who hire and fire managers all the time,” Sicilia says. “We never buy on brand or label or promises…it’s often skill. You know, the old ‘people, performance, process’…I reckon it’s 95 per cent people, and you can split the other 5 per cent any way you want.”

This conviction set Hostplus in good stead during the GFC, when other funds faltered.

“People say to us, ‘During the GFC, you must have taken action and moved things around.’ It was quite the opposite, we did nothing,” Sicilia says. “We made no changes to our SAA, because we have the financial cash flow and means to see through all of that volatility. In fact, when equity markets dropped, we purchased equities at a cheaper price”.

In recent years, the $151 billion Teacher Retirement System of Texas (TRS), one of the US’s largest public pension funds, has invested less than its 5 per cent target allocation to energy markets. Now brighter prospects for the industry promise to change that.

Five years ago, TRS’s investment in the sector was just 1.7 per cent of its target allocation. This has now climbed to 4.5 per cent, equivalent to about $6.8 billion, with current strategy wholly focused on filling the policy allocation.

TRS isn’t planning to increase its target for energy investments, but neutral investors could swing towards overweight if the industry sees the mark-ups experts anticipate. It’s an outcome TRS said it would welcome during a July presentation to the board on the state of global energy markets by energy expert Dan Pickering, president and head of asset management, at Tudor, Pickering, Holt and Co.

“Getting back to targeted allocation in a downturn is a good move because return opportunities are good in energy in coming years,” said Pickering, whose return to present to the TRS board for the first time in five years mirrors the re-emerging importance of the energy sector at the Austin-based fund, which sets itself apart from many other public pension funds with a dedicated, 10-strong Energy Natural Resources Infrastructure (ENRI) team.

It is a commitment to the energy sector that is allowing it to scoop up well-priced assets – a challenge in all other private markets at the moment. In contrast, the board heard how many other institutional investors remain lukewarm on the sector because of pressure from the ESG movement to divest from fossil fuels. But choosing not to invest in energy, or divesting, has been an easier strategy while prices have been low. The uptick in values means that these investors could start to count the cost much more than before, Pickering notes.

“You’re taking, I guess, a moral high ground but it hasn’t cost you much; it’s going to get costly to divest.” It’s why he believes divestment strategies will concentrate on the toughest, dirtiest parts of the energy market, like coal, leaving cleaner parts of the complex alone.

ENRI

The ENRI portfolio was established in September 2013 with an initial 3 per cent allocation. Three years later, TRS’s infrastructure investments were moved from the real assets portfolio into ENRI, bringing the allocation up to 5 per cent of AUM.

“Most of the infrastructure investments were in the energy complex and the fund sought to create a holistic view of where the value was in the industry,” said Carolyn Hansard, senior investment manager, ENRI.

As in private equity and real assets, most of the alpha in the ENRI portfolio comes from TRS’s 18 principal investments, rather than its 46 fund investments.

Of the portfolio, “28.7 per cent is in principal investments and since inception this has generated 17 per cent return, a whopping 13 per cent above the fund performance,” Hansard says. The portfolio’s five-year return is 7.1 per cent, despite that period coinciding with the price of oil falling from $100 a barrel to a low of $26 a barrel, before arriving at today’s roughly $60 a barrel.

The rosier picture in the energy markets is thanks to a few key factors, Pickering explained. On one hand, the US’s shale production has turned it into one of the two most important players in the global oil sector, alongside OPEC. Last month, US production hit 11 million barrels a day (b/d) for the first time; in comparison, Saudi Arabia’s production is about 10.5 million b/d and Russian production is about 10 million b/d. OPEC’s total production amounts to about 30 million b/d, to which Saudi Arabia is the biggest contributor. The fact the US produced a little more than Saudi reveals the new clout of the industry, Pickering said.

“It is going to be a growth business in the US for the next decade,” he said. “It feels good to be in the US investing in the energy business.”

New US shale production coincides with OPEC running low on spare supply because its major oil producers have under-invested during the downturn. Pickering thinks spare global capacity there is only 1-2 per cent, not enough to soak up spikes in demand, and that the US will play a key part in adding volumes.

“The US will account for 50 per cent of incremental supply in the world over the next four or five years. OPEC and Russia will be the other half.”

Oil’s future

Nor is peak oil demand coming any time soon, Pickering said. Admittedly, key factors will crimp oil demand, like the growing slice of renewables feeding the power sector and growth in electric vehicles, particularly from China, where environmental concerns around air quality are driving uptake. But in the US, Pickering noted, there is no similar growth in electric cars.

“In the US, the economics of switching to electric vehicles is not great and the government isn’t going to tell us we have to drive electric; whereas, in China [the government has done that].”

This leads Pickering to conclude that peak demand for oil won’t hit until 2030 or 2040.

“Our expectation is that global demand will grow 1 per cent a year, to peak at 110 millionb/din 2030,” he says. Pickering doesn’t expect alternative energy sources to affect this cycle of investment or the next.

“This cycle, I am plenty comfy putting money to work in conventional energy and probably the next cycle, too.”

 

 

Gone are the days when the security of a company’s data was seen as the responsibility of the IT department.These days, it’sa key concern for corporate governance. Boards must take the lead in ensuring data is protected and investigating whether company mechanisms are up to the job.

Cybersecurity risk is real and pervasive, as demonstrated by recent attacks that have put big banks, personal credit rating agencies, internet providers, the UK National Health Service and even the US intelligence community on high alert.

Threats can emerge from various sources, both internal and external, resulting in data breaches that can have a negative impact on share price, reputation and trust in the organisation’s ability to secure sensitive data, including personal information and intellectual property. A 2017 study by IT consultant CGI and Oxford Economics concluded that severe breaches caused share prices to fall by an average of 1.8 per cent.

Despite high-profile incidents, many institutional investors are only just beginning to look at the governance issues surrounding cybersecurity. This year, several cybersecurity-related resolutions have shown that investors are keen to understand how cyber aware their portfolio companies are and whether they have appropriate mechanisms to manage a breach. All of this can be difficult to assess, however, because of gaps in corporate disclosure on this topic.

An additional – and serious – consideration for boards is that the regulatory regime on data privacy and cybersecurity is being strengthened across the world with fines and penalties for data breaches.

Last year, for example, the US Congress has introduced the bipartisan Cybersecurity Disclosure Act of 2017, which would require publicly traded companies to disclose the cybersecurity expertise of any members of the board or general partner and, if the board does not have such expertise, disclose the measures the board has taken to identify and nominate future members.

In Europe, the General Data Protection Regulation came into force in May 2018, creating obligations for companies that process and hold data in the EU regardless of where they are located. Notably, the penalties for not adhering to these requirements can be up to €20 million. Similarly, in Australia, the Australian Privacy Act mandates that companies implement security safeguards to protect personal information and notify customers of data breaches.

Investors need to discuss these issues with board directors to raise awareness of potential data compromises and ensure the board is involved in assessing the robustness of security measures. This issue will only continue to intensify in the future, so investors need to start the conversation with companies now to better understand their exposure.

Global collaborative action

To improve corporate disclosure and enhance understanding of the underlying cyber vulnerabilities, Principles for Responsible Investment (PRI) has been co-ordinating a global collaborative engagement on this topic. More than 50 institutional investors, representing more than US$12 trillion in assets under management, are now engaging with companies on their cybersecurity governance.

Our report, Stepping up governance on cyber security: What is corporate disclosure telling investors?, provides a snapshot, based on a study of 100 companies, primarily in the healthcare, financial and retail sectors. The study, which forms the basis of our collaborative engagement, found that although companies are increasingly recognising cyber risks and their impacts, corporate information in the public domain does not reassure investors that companies have adequate governance structures and measures in place to deal with cybersecurity challenges.

As this dialogue progresses over the next year or so, participating members will have further clarity on how material cybersecurity risk is for companies in their portfolio, how information flows to the board on cybersecurity matters and what the process is for evaluation against peers.

Using these findings, the PRI will also put together a set of investor expectations on cybersecurity governance that companies should be able to meet. Through this process, investors will be signalling to companies that further meaningful disclosure on cybersecurity is warranted, and this will enable them to discern which companies are likely to manage risks appropriately.

Boards need to work closely with senior management to escalate the message across the organisation that security is everyone’s problem. Keeping data secure is not about buying the latest security software; it is about everyone in the company taking responsibility for keeping data secure, whether it’s deleting emails with attachments from unknown sources or protecting the data on laptops that employees take home with them.

Board members could start by ensuring that cybersecurity is on the agenda at meetings. If these issues are delegated to senior management, then the board must have regular updates from those individuals to stay current on the topic.

Fiona Reynolds is chief executive of Principles for Responsible Investment.

conexust1f.flywheelstaging.comis the media partner for the PRI in Person, to be held in San Francisco next week.