Two very different anniversaries this month send a similar message to the responsible investment community. Last week marked five years since the collapse of Lehman Brothers, while this week we celebrate the creation of EIRIS 30 years ago, giving birth to the ESG research industry in Europe. Both events show that while much progress has been made, there is a lot still to do.
Bank sustainability improving, but not enough
To understand whether global finance has become safer in the five years since the Lehman Brothers bankruptcy, EIRIS has extracted data from its Global Sustainability Ratings to compare the ESG risk management systems the global banking sector has in place today, with those in place in 2008.
This is important because it was two ESG issues – exposure to sub-prime loans inappropriately sold to those on low incomes followed by a failure to “know what you own” as financial institutions lost track of the risks involved and how they had been sold on – that were significant factors in sparking the worst financial depression since the 1930s.
The analysis shows that the banking sector has become more sustainable since 2008. Its ‘ESG Risk Management score’ has risen over five years from ‘2.79’ to ‘3.06’. This score is extracted from the EIRIS Global Sustainability Ratings service and is based on criteria that assess how well the Board and senior management address company-wide ESG risks and opportunities at over 150 of the world’s biggest banking institutions.
However, when we put this in context with other sectors we can see that banking is still lagging behind the average ESG Risk Management score of ‘3.3’ for all sectors. This puts banking below controversial sectors such Pharmaceuticals or Oil & Gas, and may help to explain some of the continuing flow of ethical lapses that the sector has faced in the last few years, from Libor fixing to money laundering.
It’s good news that global finance is safer in some respects that it was in 2008. Reforms of the industry have helped make it more resilient and outward looking and suggests we’ve learned some lessons from the sub-prime crisis.
But the low sector ranking of the banks shows that the sector still has a long way to go. Given the trillions of dollars of international public money needed to bail it out in 2008 the sector must do more to win back public trust and to show it is fully on top of its many sustainability issues.The end of the beginning for RI
This sort of analysis could not have been done 30 years ago.
Since EIRIS was formed in September 1983 it, and the ESG research industry it helped form, have grown beyond compare. In 1983 it was a challenge to find any corporate information on sustainability, now we review around a million sustainability data points each year across 3,000 companies spanning 46 countries. Almost all listed companies now report on sustainability in some way.
The growth of ESG research has helped feed the development of the wider responsible investment industry which has gone global and gone mainstream in the three decades that EIRIS has been at work. Around a fifth of the world’s capital is estimated to have signed up to the Principles for Responsible Investment (PRI), and engagements such as ICCR’s call on companies to sign up to an international accord on health and safety standards in the wake of the Rana Plaza tragedy, are becoming more frequent and more influential.
But as is the case with the banks and sustainability, there is still a long way to go. Research by the PRI in 2011 showed that despite the large number of institutions it had signed up, still only 7% of the global market was subject to ESG integration by its signatories. That’s a figure I’ll be attempting to drive up following my election to the PRI’s Advisory Council this month.
In the next five years responsible investment needs to make even faster progress.
Rising global demand for food, energy, living space and water, and the challenge of dealing with climate change mean sustainability issues will only become more material to investors in the years to come.
Banks and responsible investors alike need to show that they can manage ESG issues in a way that makes individual portfolios, and global finance as a whole, much safer to the benefit of all participants in the investment chain.
Peter Webster is CEO of EIRIS, an ESG research agency.