Shining a responsible light

The UN PRI has been a huge success in putting ESG issues into the public arena. But might investors need to do more to avoid a backlash?

by Hugh Wheelan | July 10th, 2007

Justice Louis Dembitz Brandeis, one of the most progressive US judges in history and a free market supporter, once underlined the importance of transparency in public life when he said: “Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”
As a progressive, Brandeis would have supported initiatives such as the highly successful UN Principles for Responsible Investment (UN PRI).
In just a year, the PRI has cemented its importance in the world of institutional investment with 195 signatories – both asset owners and asset managers – running about $9 trillion (€6.6bn) in assets. There are few equivalent investor lobbies of such magnitude.
The PRI needs to be congratulated, not only for its introduction of progressive principles against which investors can work to introduce environmental, social and governance best practice into their investment, but also for its acknowledgement that good principles can flounder if adherents have no incentive to improve.
The introduction of the UN PRI scoring system is the right carrot for the job. Ratings and performance are what makes the institutional investment world tick. Applying an annual ranking to progress made against the principles – with the requisite anonymity without which such an initiative could be still born – brings market practice to responsible investment. Carried out in the correct way it will give UN PRI a necessary impetus.
In launching Responsible Investor, we aim to mirror the endeavours of the UN PRI in encouraging investors to look seriously at responsible investment within their fiduciary duties. Research carried out by Freshfields, the law firm, and investment consultants Watson Wyatt and Mercer, suggests that issues including sustainability should be integral to institutional investment because they can materially affect returns over a long-term horizon; the raison d’etre of pension funds.
This discussion is by no means settled, however. Responsible Investor will be at the heart of the debate. We believe responsible investment makes good business sense for institutions and their members, but that there is a growing need to identify potential sources of responsible returns and to evaluate relevant investment products in the market.
In addition, we will challenge industry assumptions and shibboleths where we find them.
To this end, regarding the UN PRI, we have two caveats and one question mark.
The first caveat is whether asset managers could start to use the stamp of a good PRI score to market their funds?
This could be a problem because the PRI scoring system is based on voluntary submission of information to a lengthy questionnaire.
The hurdle can be cleared by regularly signalling to investors that the PRI score is not indicative, but directive. The PRI score should be a signpost for
investors to drill deeper into fund manager claims, something they already should do as professionals. As Michael Musuraca, a trustee with the New York City Employees Retirement Scheme (NYCERS) and member of the PRI board, puts it: “This is a first step that should encourage investors to get more “granular” with the results and start asking more not fewer questions.”
The UN PRI is clear about this, but it would do well to repeat the message publicly at every opportunity.
The second caveat is that asset owners should tell their beneficiaries how they are progressing. If pension funds have signed up to the UN PRI it is on the premise that their members – the owners of the money the fund manages – wish to have ESG best practice applied to the way their retirement cash is run. Again, the UN PRI is encouraging this. It is now up to asset owners to follow suit.
The question mark belongs to the UN Clearinghouse (see UN Clearinghouse article). The concept is potent: a private web site for PRI signatories where investors can discuss collaboration on their ESG issues with companies in which they invest. Unity creates force.
In private, investors argue that discussing engagement outside of the public glare is the only route to successful outcomes with the companies they petition.
They may be right.
But they may also have to make their case more forcefully to defend against a growing backlash.
In an article in the Financial Times last month, Terry Smith, chief executive of broker Tullet Prebon and chairman of Collins Stewart, the UK corporate finance and fund management house, didn’t mince his words when he said company annual general meetings had become a nightmare because of the: “annoying trivia that arrives from people whose approach to business might best be described as Swampy does corporate governance.”
Swampy was an environmental campaigner in the UK who chained himself into a series of tunnels as a campaign against road building.
Smith didn’t finesse his argument to draw a line between Swampy and institutional engagement. He said: “If there is one thing more annoying than the focus on (executive) pay it is the insistence on getting companies to produce a litany of platitudes on environmental and social issues.”
Smith said he was telling the world what most corporate chief executives were saying in private. Might it be time for investors to react and underline the importance of good corporate governance, environmental and social responsibility by putting some public sunlight on the issues they are privately collaborating on?