The integration of environmental, social and governance (ESG) factors into the investment process is being recognized as a way to enhance value by mainstream investors. However, most trusts and foundations are falling behind when it comes to responsible investment, according to a recent report from the EIRIS Foundation Charity Project.
The recent financial crisis highlighted the significance of accountability, transparency, responsible ownership and long-term investing, the report notes. “Increasingly, it is recognized that these values should be at the heart of the investment strategy of trusts and foundations.”
This “extra-financial” approach is not new, the report adds, noting that a number of charities have included ESG in their investment process for decades. “Whether or not you agree with the mission case for incorporating ESG factors, there is growing evidence that this is an astute financial decision and can be used to safeguard and enhance financial returns.”
For example, poor corporate governance has been shown to have serious consequences for individual companies and the wider economy,” says the report’s author, Sam Collin. Similarly, there is a growing consensus that climate change will be financially significant to all companies.
Given the financial relevance of ESG factors, the report says, there is a danger that by not taking such issues into account, trusts and foundations could be seen as acting imprudently and failing to secure their long-term financial sustainability.
The report suggests that as a first step, trusts and foundations determine their beliefs and position in relation to responsible investment. “A simple next step is to look into the expertise and skills of your current investment manager(s) and determine if they could potentially meet your needs.”
“Trustees do not have to become experts in an array of ESG concerns. Rather, they should ensure that asset managers have such expertise.”
If trustees decide to follow the responsible investment route, they should ensure that ESG integration forms part of their contractual agreements with asset managers, the report suggests.
“Trustees need to integrate sustainability issues fully into their governance roles,” says Penny Shepherd, chief executive of UKSIF. “This is about investment beliefs and improved contractual relationships, not about usurping the role of investment consultants or fund managers. Quality of responsible investment must become a significant factor in the awarding and retaining of mandates.”
Trusts or foundations can also join collaborative initiatives, such as the Carbon Disclosure Project, vote their shares on ESG-related issues and invest in SRI funds.
Read the full EIRIS report.
Showing posts with label responsible investment. Show all posts
Showing posts with label responsible investment. Show all posts
Saturday, May 23, 2009
Friday, April 17, 2009
Responsible investment and fixed income
In a recent commentary, investment consultant Mercer noted that while the responsible investment movement continues to gain momentum, the focus has been almost entirely on publicly-listed equities, with the bond market being more or less ignored.
“Amongst major asset classes, fixed income stands out as something of a forgotten child,” Mercer noted. “After all, the market capitalization of fixed income markets globally exceeds that of equity markets. But where are the managers with highly developed environmental, social and governance (ESG) integration in fixed income? Where are the SRI fixed income strategies? Where are the RI fixed income indices? Where are the opportunities for ESG themed investment in fixed income? The answer is that all of the above exist, but they have much less prominence than their counterparts in equity markets.”
Mercer says there are some very good reasons for the low profile of responsible investment (RI) in the fixed income world. “Firstly, single country government bond mandates make up a large slice of overall fixed income strategies and the scope to apply RI techniques in such strategies is relatively limited. Incorporating analysis of ESG issues into management of multi-country government bond strategies, whilst possible, raises some very difficult issues which are not encountered in equity strategies. Even with corporate bond strategies, the scope for active ownership is much more limited than in equity strategies and this slows down the penetration of RI thinking.”
Still, asset owners wishing to adopt responsible investment in their fixed income portfolios have options spanning broadly similar terrain to those available in relation to equity investments, Mercer points out. Those options include engagement, screening, ESG integration in corporate bond portfolios and ESG-themed investment.
“We expect that over time greater attention will be paid to RI in fixed income,” Mercer says. “After all, signatories to the UN Principles for Responsible Investment have given a commitment to integrate ESG into investment decisions across all asset classes.”
Mercer plans to release a white paper on responsible investment in fixed income, addressing issues such as: the characteristics of the fixed income market which contribute to the slower progress in incorporating RI and which will affect the way that the market develops; the merits of various RI techniques (screening, integration, etc.) in a fixed income context; ESG integration in fixed income; as well as a review of microfinance and community investment for ESG-themed fixed income investment.
“Amongst major asset classes, fixed income stands out as something of a forgotten child,” Mercer noted. “After all, the market capitalization of fixed income markets globally exceeds that of equity markets. But where are the managers with highly developed environmental, social and governance (ESG) integration in fixed income? Where are the SRI fixed income strategies? Where are the RI fixed income indices? Where are the opportunities for ESG themed investment in fixed income? The answer is that all of the above exist, but they have much less prominence than their counterparts in equity markets.”
Mercer says there are some very good reasons for the low profile of responsible investment (RI) in the fixed income world. “Firstly, single country government bond mandates make up a large slice of overall fixed income strategies and the scope to apply RI techniques in such strategies is relatively limited. Incorporating analysis of ESG issues into management of multi-country government bond strategies, whilst possible, raises some very difficult issues which are not encountered in equity strategies. Even with corporate bond strategies, the scope for active ownership is much more limited than in equity strategies and this slows down the penetration of RI thinking.”
Still, asset owners wishing to adopt responsible investment in their fixed income portfolios have options spanning broadly similar terrain to those available in relation to equity investments, Mercer points out. Those options include engagement, screening, ESG integration in corporate bond portfolios and ESG-themed investment.
“We expect that over time greater attention will be paid to RI in fixed income,” Mercer says. “After all, signatories to the UN Principles for Responsible Investment have given a commitment to integrate ESG into investment decisions across all asset classes.”
Mercer plans to release a white paper on responsible investment in fixed income, addressing issues such as: the characteristics of the fixed income market which contribute to the slower progress in incorporating RI and which will affect the way that the market develops; the merits of various RI techniques (screening, integration, etc.) in a fixed income context; ESG integration in fixed income; as well as a review of microfinance and community investment for ESG-themed fixed income investment.
Wednesday, February 11, 2009
Private equity firms adopt responsible investment guidelines
The Private Equity Council, a group representing 13 heavy-hitters in the private equity world, has agreed to adopt a set of responsible investment guidelines that they will apply before investing in companies and during ownership.
The guidelines cover environmental, health, safety, labour, governance and social issues and follow a series of talks between council members and a group of the world’s major institutional investors, all under the umbrella of the United Nations-backed Principles for Responsible Investment (PRI).
“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,” said Private Equity Council president Douglas Lowenstein. “Today’s announcement explicitly and formally affirms PEC members’ commitment to fully integrating these responsible investment guidelines into both our pre-investment and post-investment processes.”
“We signed onto PRI because we believe that encouraging policies and practices that help create a better society for this and future generations is an excellent way to maximize our investment returns,” said Ted Eliopoulous, Interim Chief Investment Officer of the California Public Employees Retirement Systems, which is a limited partner in many PEC members’ funds.
Under the terms of the guidelines, PEC members will consider environmental, public health, safety and social issues associated with target companies when evaluating whether to invest, as well as during the period of ownership. Members will also seek to improve the companies in which they invest for long-term sustainability and to benefit multiple stakeholders on environmental and social governance issues.
Council members are: Apax Partners; Apollo Global Management LLC; Bain Capital Partners; the Blackstone Group; the Carlyle Group; Hellman & Friedman LLC; Kohlberg Kravis Roberts & Co.; Madison Dearborn Partners; Permira; Providence Equity Partners; Silver Lake, THL Partners; and TPG Capital (formerly Texas Pacific Group).
The guidelines cover environmental, health, safety, labour, governance and social issues and follow a series of talks between council members and a group of the world’s major institutional investors, all under the umbrella of the United Nations-backed Principles for Responsible Investment (PRI).
“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,” said Private Equity Council president Douglas Lowenstein. “Today’s announcement explicitly and formally affirms PEC members’ commitment to fully integrating these responsible investment guidelines into both our pre-investment and post-investment processes.”
“We signed onto PRI because we believe that encouraging policies and practices that help create a better society for this and future generations is an excellent way to maximize our investment returns,” said Ted Eliopoulous, Interim Chief Investment Officer of the California Public Employees Retirement Systems, which is a limited partner in many PEC members’ funds.
Under the terms of the guidelines, PEC members will consider environmental, public health, safety and social issues associated with target companies when evaluating whether to invest, as well as during the period of ownership. Members will also seek to improve the companies in which they invest for long-term sustainability and to benefit multiple stakeholders on environmental and social governance issues.
Council members are: Apax Partners; Apollo Global Management LLC; Bain Capital Partners; the Blackstone Group; the Carlyle Group; Hellman & Friedman LLC; Kohlberg Kravis Roberts & Co.; Madison Dearborn Partners; Permira; Providence Equity Partners; Silver Lake, THL Partners; and TPG Capital (formerly Texas Pacific Group).
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