It was the most common response to the global financial crisis. The one argument that all sides of the debate could unite around from pension funds to protestors, from regulators to speculators. We all agreed that to create more sustainable capital markets investors must embrace a new age of transparency.
Four years on, the global responsible investment community is still waiting for this new age to arrive. The specific disclosures expected from both asset owners and asset managers remain largely unclear.
In the last week however, there have been two developments that may prove significant, especially for asset owners such as pension funds.
The largest public pension fund in the US, the California Public Employees Retirement System (CalPERS), has just released its first holistic Sustainable Investment report. The report discloses details of how CalPERS is working to take account of governance, environmental and social issues across its total fund of $234.3bn (€177.4bn). It’s believed to be the first report of its kind by a large public pension fund in the US. In this context the CalPERS report offers a valuable example of what might be expected from international asset owners in this new era of transparency.
The report comes less than a week after the UN-backed Principles for Responsible Investment launched a new reporting framework for its 850+ investor signatories. The framework, which is being run on a voluntary basis this year but becomes compulsory from 2013, is the most significant attempt yet to define what specific indicators international investors should report against to disclose their responsible investment activity.Examples of the indicators included in the PRI framework include asking asset owners whether they consider ESG competencies in their recruitment and retention of investment managers. Also asking investors to reveal the number of listed equity investees they have engaged with on ESG issues. The framework is still under consultation but already looks set to provide the basic standard for transparency for the global responsible and sustainable investment community.
Alongside the rise of ‘comply or explain’ regulatory regimes such as the Stewardship Code in the UK and the Code for Responsible Investing in South Africa (CRISA) these two developments suggest that responsible investment reporting is following the path set by the world of corporate responsibility reporting in the 1990s.
Twenty years ago only a handful of companies reported on their environmental and social impacts. Those that did had no frameworks to ensure consistency. But fast forward two decades and corporate responsibility reporting is now an essential tool of most major companies, and provides comparable information across companies thanks to initiatives such as the GRI, Carbon Disclosure Project and UN Global Compact. Close to 6,000 CSR Reports were published in 2011 according to the Corporate Register.
The last week’s developments show responsible investment reporting is following that template. A basic standard is emerging from the PRI that allows interested parties to judge and compare how peer investors are actually performing on responsible investment activity.
While on top of this, individual institutions like CalPERS can produce a tailored annual sustainable investment report that incorporates these basic elements but also speaks directly to their members and other stakeholders.
But there is a long way to go, and investors must stay focused on outcomes, not outputs.
For example, the early experience of the UK Stewardship Code for institutional investors has been one of impressive take-up but limited real-world impact. The Code has attracted more than 200 signatories since its launch in 2010, but a survey by the Financial Times last month found that more than three-quarters (79%) of FTSE 350 companies that responded had experienced no increase in meaningful engagement following the introduction of the Code.Investors also need to go further, and find ways to demonstrate how their ESG integration or engagement activities have actually helped them perform against both financial and social or environmental indicators.
Responsible investment reporting also needs to avoid the trap of ‘too much data, not enough information’. This is no easy task, especially given the wide array of investment strategies, asset classes and capital forms in modern markets.
Despite the difficulties, the age of transparency is slowly emerging. It remains a core part of rebuilding the public’s trust in financial markets.
Frankal is former Head of Communications for the UN PRI and Director of ESG Communications. Email