It’s often said that investment beliefs provide the solid frame on which investment strategy can hang. Some of these Magna Carta’s are beguilingly simple, like ‘Costs Matter’. Others may enshrine beliefs like ‘A Long Term Investors Has Opportunities and Responsibilities.’ So, it was with keen interest that delegates at PRI in Person 2015, the annual conference for the UN-backed international network of investors working to put the Principles for Responsible Investment into practice listened to asset owners’ talk through their first steps in enshrining ESG within their own organisations.

“ESG beliefs now stand equal to our other investment beliefs,” says Anne-Maree O’Connor, head of responsible investment, at the N$29.6 billion New Zealand Superannuation Fund.

New Zealand Super set about articulating its investment beliefs with a long list of loose investment statements that the team subsequently divided into beliefs and facts, explains O’Connor.

It was “a very interesting process” out of which came a concrete commitment to ESG: That ESG represented an important opportunity, would help control risk and would result in a “payback”.

She describes the process, backed by a library of research and a visionary board, as “getting off the tracks and onto the train.”

O’Connor believes that enshrining ESG in the fund in this way gave the team the courage to “maintain its nerve in market crisis and volatility.” It’s also given a firm direction on ESG for employees and investment teams.

For some funds, the financial crisis hastened establishing investment beliefs around ESG: Confidence shaken, it was necessary to build a new set of beliefs.

“We started from a conviction that ESG will add value, but after the financial crisis we were asking what our role is? What is our risk? These very fundamental questions popped up and rather than looking in the rear view mirror to solve the puzzle, we realised we needed to look ahead,” says Marcel Jeucken, managing director, responsible investment, at the €186.6 billion ($204 billion) Dutch pension fund PGGM.

Similarly US fund CalPERS, “underfunded and climbing back from the horror of financial losses”, found the financial crisis concreted its ESG investment beliefs, says Anne Simpson, investment director at the fund.

At New Zealand Super, investment beliefs have affected how they choose managers since they are expected to have the same beliefs.

Investment beliefs have also become stronger over time since they evolve and become a framework for all big decisions, notes O’Connor.

“Over time we’ve become much stronger about our ESG mandate and expectations. Managers change and adapt – or not,” she says.

Similarly at CalPERS, Simpson explains that every asset class is now benchmarked against the fund’s investment beliefs.

 

 

“At West Midlands we believe robust governance makes companies much more resilient to shocks,” says Leanne Clements, responsible investment officer at the Wolverhampton-based £11.4 billion West Midlands Pension Fund.

It’s the reason why the UK local authority fund has been working with an ongoing PRI-led collaborative engagement process exploring different corporate practices around director nominations in 23 companies in France and the US.

“It’s not our job to micromanage companies, but director nominations are a proxy to having a real effect,” she said speaking at the UN-supported PRI in Person 2015 conference in London.

PRI has long been urging investors to play more of a role in the election and oversight of corporate boards, arguing that a robust director nomination process is of fundamental importance to board effectiveness.

By prioritising this area, it says, asset owners can become directly involved in nomination committees or exercise their voting rights with profound effects on governance.

The PRI’s information gathering process, ongoing until next year and broadly welcomed and perceived as relevant by corporations, has already illuminated board practices with possible governance implications.

In French companies access to the board isn’t always easy, observes Michael Herskovich, head of corporate governance, BNP Paribas Asset Management. “French companies don’t see boards as a point of contact for investors. Board nominations, or the possibility for investors to speak directly to boards, is still a first step. We are not there yet.”

Other practices include chief executive involvement in the selection of non-executive directors in some French companies. “Is this best practice?” doubts Jean-Nicolas Caprasse, director, ISS Europe, ISS.

Many French companies also have combined chief executive and chairman roles, another issue high on the governance radar, the research has revealed.

The PRI-led collaboration with US companies, where demands for proxy access which gives shareholders a formal right to propose their own candidates alongside those named by the current board is growing, shows that corporations with substantial shareholders tend to disclose less.

Boards with more women also tend to have better disclosure. In France, researchers found the number of foreign directors on a board tended to improve the level of disclosure.

“Disclosure of a board’s makeup is crucial for shareholders to be able to examine a board’s skills mix, the gender mix, experience and age. It creates a really good picture of where they are strong and where there are gaps so investors can then help push to fill the gaps,” says Clements. “We would encourage investors to ask companies if they are doing a skills matrix and then show it to shareholders so that at election they can understand if those new directors coming in will really fill the gaps.”

 

Spurred on by its vocal student body and a rich ESG precedent it’s no surprise that the $91 billion University of California is leading on climate change investment.

“We thought about our beliefs and realised that climate change matters because it will impact our investments over the long term. We can’t afford to sit idly and see our returns harmed over time,” said Steven Sterman, senior portfolio manager at the fund, offering advice to other funds starting their own climate change journey and speaking at PRI in Person 2015, part of the UN-backed initiative to encourage responsible investment.

The University of California now perceives climate risk as mainstream. And it is not afraid to change what it owns in its portfolio and divest from companies that lack “good long term economic prospects.”

The fund also seeks to influence behaviour by being an active and engaged investor “because if we are going to solve these issues we need to get large corporations to change how they behave.”

The University of California also invests in “solutions” by investing in companies that are tackling climate change, and by acting with its peers. “We are not going to be able to change anything by ourselves. We work with like-minded asset owners and other investors.”

Helen Wildsmith, head of responsible and ethical investment, at the £6 billion CCLA, the UK’s charity fund manager independently owned by its clients which include the Church of England, began addressing climate change in earnest in 2012 with a new climate change policy emerging this May.

“Leave yourself enough time to go through the process,” she warns, describing the fund’s path. “We saw climate change as a real risk to our portfolio, particularly the risk of assets stranding.”

Strategy is primarily focused on tough engagement with companies, specifically in the oil and gas sector where Wildsmith has had unprecedented success through the “Aiming for A” investor coalition.

“If companies in the energy sector don’t respond to engagement overtime we will divest,” she says.

Launched in 2012 to engage on climate and carbon risk with the 10 largest extractives and utilities companies in the FTSE 100, the group has already affected change at BP and Shell, both expanding their annual reporting and additional transparency around operational emissions management in the wake of shareholder pressure.

Now she wants to take the battle further afield. “We are looking at how to take the ripple to Chevron and Exxon in the US,” she says. “We are also puzzling through the right next steps for the diversified mining groups listed in London, as well as looking at how to extend the concepts to auto, banks and insurance sectors.”

In 2012, climate change at Australia’s A$32 billion HESTA Super Fund became a separate policy within its ESG strategy in a reflection of its importance, says Robert Fowler, executive manager, investments and governance, at the fund.

Strategy here also eschews divestment.

“We’d rather engage with companies and affect change.”

Nevertheless the fund has put restrictions on its thermal coal investments across the entire portfolio.

“We were being contacted by NGO’s; the Australian government started to tax carbon and there was a tipping point in our research,” says Fowler explaining the thinking behind the strategy. “There was a real risk of stranded assets but we also wanted to send a signal to the market. This was a signal to local players that they shouldn’t expect superfunds to invest in big coal projects.”

At HESTA, investing in climate change solutions includes wind farms and other infrastructure, as well as venture capital funds. “It’s all about putting capital to work to solve the problem,” he says.

 

“How can we entice savers to look at how much is in their pension pot? How can we make pensions more dynamic and interesting to our beneficiaries?” asks Jennifer Anderson, responsible investment officer, The Pensions Trust, the £7 billion scheme which manages pensions for the UK’s charitable sector.

The problem under discussion at the UN-backed PRI in Person 2015 conference was the lack of interest among many pension beneficiaries in how their pensions are managed, and even less knowledge or appetite to drive ESG investment strategies.

“ESG is an opportunity to draw in interest,” argues Catherine Howarth, of pressure group ShareAction who believes the wholesome image of ESG will sit better with savers grown weary of financial scandals. “Financial services and investment comes low in public trust. Rebuilding it is an opportunity and listening to beneficiaries is a great way of getting back public trust.”

But as well as listening to beneficiaries, pension funds would do well to study human behaviour over time, suggests Rory Sutherland, vice-chairman, Ogilvy & Mather UK.

Trends in human behaviour, seen through his expert marketing lens, offer valuable and different ideas on what could motivate people to care more about ESG.

Sutherland believes that consumer behaviour shows that sustainable and responsible concepts or inventions will do best if they “only do good by stealth.”

“Don’t always tell everyone. Things are best chosen not prescribed.”

Similarly too much eagerness to display altruism can be counter productive.

He suggests that people have fixed expectations around the products they buy or the ideas they favour that are best left alone.

“Fly spray should smell horrible; an energy drink shouldn’t taste particularly nice because otherwise it will be less effective,” he says to illustrate the point.

He believes that the best way to pursue the take up of an idea is to not pursue it directly.

“The most profitable businesses don’t pursue profit directly. The most successful are pursuing another motivating end.” Hiking prices to take advantage of others misfortune is “an economic no no,” and he says that humans have an innate and powerful sense of fairness. Moreover, when people are given something for free they “feel good.”

“Really clever businesses understand this psychological factor.”

He suggests that even though many people are motived primarily by self-interest, this can often lead to a net value for society as a whole.

Ordinary self-interested capitalism gets a “bum rap,” yet many corporations also have valuable and important social and sustainable seams to their business that are often invisible.

“Lots of sustainable activity within a business isn’t branded as sustainable because it wasn’t an original motivation,” he says.

Similarly many consumer goods have important benefits that were not the original intention behind the invention.

“Soap sellers at the turn of the last century helped stop disease, but soap wasn’t marketed for this. Capitalism does things that are invisible and not intended.”

“Understanding the complexity and phycology in business can lead to fantastic things. Consumers as well intentioned, people are well intentioned.”

 

There are three primary motives for investors to act responsibly, argues Elroy Dimson, chairman of the Newton Centre for Endowment Asset Management, Cambridge Judge Business School and Emeritus Professor of Finance at the London Business School, speaking on the first day of the UN-supported PRI in Person conference at London’s ICC, ExCel conference centre.

The first is complicity, which he defines as an “uncomfortable feeling” that comes with receiving rewards via investment in “questionable” corporate activities.

If, say, portfolio returns came from exposure to Deep Water Horizon, the oil rig that exploded killing crewmen and leading to the largest oil spill in US waters, or Indian company Union Carbide’s pesticide plant in Bhopal, where a gas spill killed thousands, Dimson argues investors become “tainted” by such ownership.

“Wanting to end this complicity can drive investment decisions quite differently,” he says.

A second motive for responsible investment is influence, whereby investors seek corporate change through their investment strategies. Here he argues how active investment by Norwegian funds in Monsanto, the US agricultural group, led the company to change policy employing children in its Indian cotton fields. Now the company has commitments to child education and providing schools.

“Asset owners have an opportunity to influence corporate decisions,” he says, adding that in many cases active asset ownership can lead to investors often “knowing more” than the company itself.

Dimson believes that “exiting from stocks” is not as effective a tool as “using your voice” to engage with companies to improve practice for better returns.

“Continued engagement is much better than simply divesting from companies that displease you.”

He adds: “If Norwegian investors sell holdings in coal, which are then bought by China, nothing has changed.”

A third factor influencing responsible investment is the phenomenon of “universal ownership.”

Because today’s investors hold diversified, extensive portfolios it is in investors’ financial interests to make sure they don’t have activities that de-skill the workforce or ruin the environment, risking other companies within the portfolio.

For example, some companies might benefit by externalising environmental costs through pollution, but this could raise costs for others, resulting in an economic loss across the portfolio as a whole, he explains.

 

“It is in our interests to analyse ESG risk,” argued Douglas Hodge, chief executive of PIMCO in his opening address at PRI in Person, the UN-supported international network of investors working to put the six Principles for Responsible Investment into practice.

Hodge set the scene for the three day conference, where delegates gathered at the biggest PRI event to date, with a medium-term economic forecast that puts ESG principles at the forefront of investment decisions.

Hodge said in the past investors viewed ESG “as unconnected to fiduciary duty” or “a type of investing reserved for the do-gooders” and “investors prepared to compromise.” In today’s changed world PIMCO has embraced ESG investment as intrinsic to its strategy.

“ESG risks are real. They can cause real losses for companies and capital. ESG makes good business sense,” he said.

Hodge described the current investment landscape as “low and flat,” in a nod to low interest rate and flat yield curves.

A new post crisis world is also characterised by heightened volatility, “a tsunami or regulation,” and little chance of a return to pre-crisis growth.

He said developed countries are now confronted by the so-called “3Ds” of debt, deficit and demographic challenges.

“The stock of debt limits extension of credit and ageing populations make creating organic growth very difficult.”

However he adds that banks’ reduced appetite to lend has triggered new sources of funding.

“Historically banks provided most debt finance. Now there is an increasing array of non-bank actors providing funding to the corporate sector.”

Emerging economies aren’t faring any better, with the growth curves in the key emerging economies of Brazil, China and Russia also flat. Although much of the world’s wealth creation has come from emerging markets, “emerging economies are not always stable and remain prone to internal and external disruption factors,” he warns.

With “meagre” investor returns in bonds and equities and a world faced with “more disruption” and “rising demand for natural resources” he urges investors to embed long-term ESG analysis in their decision making.

“ESG investing makes sense.”

It will also be driven by the rising influence of the next generation, he predicts. The millennials have different priorities that pay greater attention to sustainability than their parent’s generation.

“This new generation will want to invest according to their values and beliefs,” he predicts.