Taking RI from in-house to front of mind

The industry needs to be better at thinking how responsible investing can be accessed by smaller funds or those lacking sufficient internal resources, David Russell, co-head of responsible investment at the UK’s Universities Superannuation Scheme, says.

Russell, who will join a panel at the Fiduciary Investors Symposium in Santa Monica produced by Conexus Financial, publisher of conexust1f.flywheelstaging.com, speaking about “revisiting corporate governance practices to support expanding portfolios and constituencies”, says many large funds are now well resourced across the issues.
“But the RI practices we have developed at USS, which employs six people to address the issues, may not be suitable for other funds. The industry needs to look at how to help develop RI in all funds irrespective of size,” he says. “It is not just a large fund issue; RI issues are relevant to all asset owners.”

He notes that more needs to be done to develop the tools that funds can use to encourage both their consultants and their asset managers to integrate ESG into their processes. USS has been an early adopter of ESG assessment across its portfolios, first developing a responsible investment policy in 1999 and appointing its first in-house responsible investment adviser the following year.

ESG materiality, current and future

The £34-billion fund recognises that integrating ESG factors into the investment approach is challenging, and so it looks at “extra financial factors” into asset selection and risk management. Its most recent review of responsible investing was in 2006, and it now has a strategy that seeks to protect and enhance the long term value of the fund by ensuring USS is an active and responsible investor.

“Our view of fiduciary duty hasn’t changed,” notes Russell. “We believe ESG issues are material and should be taken into account in investment processes. Unfortunately, given the time scales over which public equity investments in particular are made, and how the market considers ESG issues, they’re not always material to an investment decision is made today.”

To address this, USS has multiple approaches to RI, integrating ESG issues where they can be, and engaging with companies or even policy makers when they are not obviously material now.

Call it before it happens

Russell believes corporate governance is something that fund managers are more attuned to.

“Whilst governance isn’t easily quantifiable, it is something that fund managers are used to incorporating into their investment decisions”.

Russell believes that this isn’t yet the case with environmental and social issues, which are just as difficult to value, and where investors, policy makers, and society as a whole still need to recognise the financial implications of poor management.

Over recent years, Russell says there have been many examples of how such mis-management of environment and social aspects have materially impacted the value of companies. He points to BP, Vedanta, and Olympus whose share prices were all affected by either poor governance or poor internal management.

“The more there are such obvious examples where poor ESG management impacts value, the more likely both pension funds and their fund managers will do something to address them” he says. “The real trick will be to be able to call them before the happen.”