ESG USA conference report: “To BP or not to BP?”

Responsible Investor held its second ESG USA conference in New York last week. Here are some of the highlights:

Troubled oil major BP was a hot topic at the event, with one major investor clearly laying out its intentions. “We will hold BP until it goes bankrupt because it’s in our index funds,” said Janice Hester Amey, portfolio manager, corporate governance at CalSTRS, the $132bn California State Teachers’ Retirement System. “We’re going to own it whether they do the right thing or not – we have to have somewhere to put the capital.” The comments reflect the importance of BP to institutional portfolios.
Cheryl Smith, president of Trillium Asset Management and chair of the Social Investment Forum summed up the dilemma for investors, quipping: “To BP or not to BP?” She added: “Our error was saying to ourselves, what do we put in its place [in the portfolio] if we take it out? Turns out, cash was better.”
Kara Hurst, vice president of Business for Sustainability told delegates she “would love if BP were the tipping point that prompted investors to look at the extra financials of a company – and look at value chain”.

Rob Berridge, Senior Manager of Investor Programs at Ceres, said the whole BP disaster could be an inflection point in environmental, social and governance factors going mainstream – a view echoed by most speakers.

Darragh Gallant, director of US operations at Jantzi-Sustainalytics, saw a closer collaboration between research providers and investors going forward. A balance was needed on issues suchas BP or “investors risk being stampeded from one issue to another”. She made the point that on the Alberta tar sands issue, investors struggle to understand the language being used by companies and NGOs.
The issue of getting your asset managers to deliver on ESG was raised by Anne-Maree O’Connor, Head of Responsible Investment at the New Zealand Superannuation Fund. “We really need our managers to up their skills in this area,” O’Connor said. “It’s difficult to present a check list to your advisor and say ‘get the managers that do that’,” she added, noting that passive and quantitative managers find ESG quite difficult but stock picking managers “get it”.
The fund is increasingly looking to work with its passive managers, expecting them to help it with governance.
The fund is looking to integrate ESG across asset classes, such as private equity, commodities, real estate and catastrophe bonds.

Peter de Simone, Director of Programs at the Social Investment Forum, noted there had been a “big push back from the business community” on proposals for improved proxy access by investors. RiskMetrics’ Peter Kinder called for discussions about a constitutional amendment regarding corporations and civil society.

Adam Kanzer, managing director at Domini Social investments, said the recent release on climate change by the Securities and Exchange Commission will help to put the issue on the radar screen of companies and boards.

The SEC, he said, has a poor track record on enforcing environmental disclosure. Investors were not plugged in to what Environmental Protection Agency disclosures and he called for more cooperation between the EPA and SEC. He said: “The government has this information and then we ask the company to disclose it to investors – the whole system is a mess.” Other speakers mentioned that the SEC and EPA are starting to cooperate on data while a delegate from the floor added the EPA is improving its greenhouse gas database, “well aware that the financial industry would like this data”.

State Street Global Advisors’ vice president Christopher McKnett said SSGA is thinking about green REITs with investors and that green bonds have “a very clear investment case”.

Millicent Budhai, director of corporate governance at the New York City Comptroller’s office saw “huge discrepancies” between fund managers’ voting guidelines and their actual voting record. “It tells a totally different story, so that’s a dilemma for us,” she said.
Budhai added that some companies are resistant to using the Global Reporting Initiative metrics as a number think it’s “not for them”.

Saskia van de Doel of the Responsible Investment team at PGGM Investments argued that “the tone at the top is key” in getting RI principles accepted. The fund has ambitious growth targets for ESG integration in all asset classes. By end of the year portfolio managers will have to identify the critical issues in their portfolios and howthey can be integrated into processes. PGGM is working with the University of Rotterdam on the social return of investments.
The need for top level buy-in was echoed by Cherie Santos-Wuest, portfolio manager, corporate social real estate portfolio at TIAACREF. “Pressure comes from without and within. It has to come from the top and our clients ask for it.”
There are now green real estate initiatives across the plan’s entire commercial real estate portfolio, she said, leading to an 8% reduction in energy and $9m savings in electricity alone.

John Wilcox, chairman of consultancy Sodali, made five suggestions to institutional investors: 1) define your mission clearly. 2) clean up your own governance – practice what you preach. 3) deal with the split brain issue – where managers and governance people think differently. 4) review your incentive programme to reward long term results. 5) use your shareholder rights effectively.

Neil Johnson, head of Americas Global Clients and Marketing, SAM, said: “Right now we are investigating integrating sustainable forestry and agriculture as additional themes for investors.” He pointed out SAM has just sent out its 2010 survey to 2800 companies. SAM is saying to companies: “If you want our investment dollars or to be in our indices you need to look at these issues. We will vote with our feet. We tell them what their competitors are doing.”