ESG issues ‘are’ financial risks for pension funds says influential Towers Watson head, Roger Urwin

Respected consultant predicts advent of ESG credit ratings.

The assumption that environmental, social and governance (ESG) issues are ‘extra’financial is wrong, but better metrics are needed to prove their short to medium-term material impact on company performance, according to Roger Urwin, global head of investment content at Towers Watson, and one of the world’s most influential investment advisors. Speaking to, Urwin, who is also an advisory director to MSCI Barra, which recently bought RiskMetrics, the New York-based risk and ESG firm, said he predicted that one development that might dispel the extra-financial argument could be the launch of ESG credit ratings, akin to bond ratings. “There’s a basic assumption that if extra financial issues matter then they should already be there in investment analysis and decisions. It’s not an unreasonable assumption, but as you prod at it you realise that it is a weak argument.” Urwin said that because fund manager mindsets are set on 3- or 12-month returns because of the business structure, there was an “all-too-ready reflection” that extra financial impacts might only affect share prices over a longer time-frame: “I think that is wrong because extra financial influence on stocks is set at a gradient which is quite low which means that it may take five years before you can see the effects. But just because you can’t necessarily assess it in 3 or 12 months that doesn’t mean it doesn’t exist. It’s quite a subtle investment belief that has gone wrong in the investment community. Investorsare much more inclined to work on the things that are most measurable and not so much on the extra-financial factors that are harder to measure.” He said he did not believe this would be a “forever type of statement”. Instead, he predicted the take up of credit rating in the ESG area: “In the same way that a bond is measured as triple AAA, a company could be AAA ESG. When measurement happens, things get respect. When things aren’t measured they don’t get as much respect as they should do. There is a corollary, of course, that sometimes measuring things encourages counter-productive behaviour around the measurement, but you always have to deal with that. I think the calibration of this area is going to make a huge change.” Urwin said it was likely there could be competition on ESG credit ratings amongst the ratings agencies. He said the introduction of better ESG metrics would also prompt asset owners to have a look at whether what their managers are selling to them is truly differentiated by its sensitivity to ESG issues. Another interesting issue, he said, could be the development of accounting and quality measures for extra financial factors: “Hypothetically, if I’m a member of a defined contribution (DC) pension plan and I like the sustainability option, then I want some evidence and validation that the investment decisions I’m making are doing something in the right direction, such as the carbon footprint of the portfolio. You need that sort of measurement to be stamped on the tin.”
Read the full RI interview with Roger Urwin