Just what is the state of play on ESG integration into institutional investment in the US, often cited as a global laggard? Top-level speakers and more than 300 attendees at Responsible Investor’s 2011 ESG USA conference on December 13 in New York debated the question during a day of lively panel discussions and Q&A. Tom DiNapoli, Comptroller of the State of New York and sole Trustee of the $150bn New York State Common Retirement Fund in a keynote speech to conference explained why the fund was a firm proponent. He said it looked at ESG issues as a forward-looking lens covering anything that might potentially impact the fund’s financial risk profile. He cited the case of Massey Energy where the fund led a significant coalition of US investors to improve safety and governance problems after the 2010 explosion at Massey’s Upper Big Branch mine in West Virginia, which killed 29 workers and unleashed a barrage of criticism about the company. He noted that the subsequent resignation of Massey CEO Don Blankenship ended up unlocking investor value via a premium on the share price paid for the company when it was sold in January this year to Alpha Natural Resources. He said current ESG focuses for the fund included say-on-pay and climate change issues, but noted that it had been particularly active on the issue of hydraulic fracturing. The Comptroller said the fund would be more active still in the 2012 proxy season putting the issue forward as a major concern with companies in the oil and gas sector during next year’s AGM season.Michael Garland, Executive Director for Corporate Governance at the New York City Comptroller’s Office, which oversees the $120bn in assets for New York City’s five public sector pension funds, said say-on-pay would also be a big 2012 AGM issue. He added that he expected a number of large US pension funds, including New York, to also step up on proxy access, or the right to nominate directors to a company’s board, which was mooted in the US Dodd Frank regulations and then struck down by a challenge in the US courts from the country’s Chamber of Commerce. He said it was notable that Norges Bank Investment Management (NBIM), the manager of the NOK3.2trn (€413bn) Norwegian Government Pension Fund, had already filed shareholder proposals on the issue at Wells Fargo, Charles Schwab, Western Union, Staples, Pioneer Natural Resources and CME Group as part of its efforts to strengthen shareholder rights. With 2012 being a US election year, Garland said he expected the issue of corporate political contributions to be centre-stage also among investor governance concerns. However, Roger Urwin, global head of investment content for consultancy firm Towers Watson and an advisor to MSCI, said there were still “big and ugly roadblocks” to wider ESG take-up in the US outside of convinced funds such as New York State Common and the New York City funds.
He said Northern Europe was well developed in its ESG beliefs and practice with Australia and the UK following closely behind. In the US, however, the idea that ESG
issues might be mispriced in the market is just not broadly accepted and there is also no belief that there is a time horizon problem for institutional investment. I like to put forward the idea though that we are building tomorrow’s portfolio today and that we need to have a capitalism that is fit for purpose for long-term inter-generational investors.”
Jay Youngdahl, Trustee for the $650m Middletown Works VEBA benefit fund and a Partner at law firm, Youngdahl & Citti, said a “false concept” of fiduciary duty remained the major barrier to the incorporation of ESG factors in investment decision-making in the US: “It is a refuge for people who do not want to see ESG put into investments, but it does not need to be. One crazy notion concerning investment in areas like sustainable infrastructure is that if the private sector isn’t involved then there cannot be a financial argument for long-term public sector investors to be putting their money there: it’s nonsense.” Kirsty Jenkinson, Director, Markets and Enterprise Program at the Washington D.C.-based World Resources Institute, said that while there had been major national setbacks in green energy policy which had seriously impacted green investment, at a local level there were far more positive developments: “There are 29 states with renewable portfolio standards organised on a bi-partisan basis. Elsewhere in cities like San Francisco there are city level initiatives like energy efficiency property standards. So it’s not all doom and gloom.” A major influence on ESG in the US, however could be the signing during the last year of the UNPRI by large US fund managers such as Blackrock and PIMCO. In August, PIMCO signed PRI and adopted ESG integration into its overall investment process.
Michael Burns, Executive Vice President at PIMCO told the conference that the firm support of MohamedEl-Erian, PIMCO CEO had been instructive in moving the fund manager forward quickly on the issue: “We’d been doing in-depth research into ESG for 6 to 8 months, which involved gathering data to see what we needed to do and we had a number of Northern European investors help us understand at an early stage the value of ESG factors in investment decision-making.” He said the review revealed that PIMCO was already carrying out a number of ESG-related practices, such as strong corporate governance requirements, but that it was bad at communicating this to its clients. He said the final presentation on whether to become a PRI signatory was accepted by El-Erian within eight minutes: “He actually added some more explicit statements to some of the things we said we would ‘try’ to do as PRI signatories.” He said one major issue holding back investment mangers in ESG was the “tough conversation” that invariably had to take place with non-ESG supportive clients. “Other hurdles include investment in technology, training and research but it is an outlay for which we believe we will see the benefits of overtime.” He said asset managers also had to get comfortable with the legal ramifications of signing up to the UNPRI, which he added was undoubtedly making some firms step away. “For us, we also had the issue of being a fixed income house, which makes things slightly different for ESG integration that is usually applied for equities. There is a dearth of academic research for example on ESG and fixed income and a need for robust industry measures. As a result we are developing our own proprietary ESG measurement system. This is a significant piece of work to fully integrate into our investment processes. We are also looking quite specifically at how and when ESG issues impact investment portfolios.”