A look down the programme of the Fund Forum conference in Monaco last week – one of the world’s largest asset management gatherings – showed ESG and sustainability moving clearly up the mainstream funds agenda: two major plenaries and an entire afternoon stream (admittedly among five other streams…but let’s not split hairs) discussed topics from SRI fund sales to corporate governance, impact investing and ESG integration.
That was heartening. But Bob Geldof of Live Aid ‘give us your money’ notoriety hectoring a packed auditorium full of fund management executives, marketeers and distribution professionals about the Rana Plaza scandal in Bangladesh, Apple’s supply chain problems in China and a lack of engagement by the finance industry for investment into Africa…well, that was almost ecstasy for an RI advocate: “From now on it has to be about responsible investment!” said Sir Bob, and a few of us were almost on our feet in the back row. Or we would have been if there had been any standing room….
Geldof slammed what he called the “disgraceful” pay rations of US corporate executives at 384 times that of the average employee and skewered the reputational problems of the finance sector as a whole: “Libor fixing, product mis-selling, fraud, CDOs that no-one understands…..it can’t last.”
His mantra though was Africa, and the dearth of investment across the continent despite a rising middle class and broad continent GDP growth rates of 6.6% last year, and higher in some of the more developed markets. He noted the problems of infrastructure (markets, rule of law and regulation), butsaid that these were not exclusive to Africa and could equally be levelled at many parts of Asia. His call was to look at the potential opportunity ten years hence in a young, fast growing continent. Geldof has put his mettle where his mouth is; pointing to last year’s first close on an African private equity fund called 8 Miles – the shortest distance between Africa and Europe – which he is promoting as non-exec Chairman. The fund raised more than $200m last year from investors including CDC, the UK development fund, the African Development Bank, the International Finance Corporation and Morgan Stanley. Dambisa Moyo, Author (Dead Aid, How the west was lost) and economist told the conference that GDP growth in some African countries was at 7%+ and not primarily based on commodities exports. However, in contrast to Geldof’s private equity strategy for Africa, Moyo said she believed it was better to invest in public equities in Africa. She said there was generally a lack of broad talent in smaller private companies across the continent and that private exits were difficult. She said that capital buffers within large companies meant that you could also ensure that potential infrastructure problems such as power generation were also covered. Mark Mobius, the renowned emerging markets investor, gave a hands-on perspective of one of the things that he says keeps him awake at night: corporate governance, which in China, he said, was a particular problem, but one shared by many markets around the world. Interestingly, Mobius said he favoured Chinese stocks where the government was closely involved: “Those companies that still have ownership interest from the Chinese government are actually better because they tend to have two sets of eyes on
what is happening and the government favours minority shareholders, which is what we like to see.” Mobius said corporate governance issues had always been present in emerging markets investment, but that investors were noticing them more, particularly around ownership and control of companies. However, he said things were improving because of active investors that are voting their shares, writing to companies and sitting on boards. Mobius expressed concern about social unrest in Turkey and Brazil but said his biggest political risks were forex control and government confiscation/nationalisation of private assets: “It’s a change in philosophy to start closing markets to outside investors that worries me.”
In a specialist panel on responsible investment and ESG integration, Matt Christensen, Global Head of Responsible Investment at AXA Investment Managers, outlined how the firm has been working with its UK equity team on the practical applications in portfolio construction of looking at what were traditionally considered as non-financial measures such as corporate human capital development, health and safety and workforce stability and how they can be incorporated into investment modelling: “The basic premise is very simple: how can we buy cheap companies where we can do deeper research on potential revenue developments or robust structures and strategies that would enable us to tilt our portfolios accordingly to make money in what are difficult markets.” Matthew Kiernan, Founder and Chief Executive of Inflection Point Capital Management, the specialist sustainability orientated fund manager, told the conference that the “it must outperform” challenge thrown down to funds that use ESG criteria as part of their investment strategy was a misnomer: “Do equity funds outperform, do bond funds? Performance depends, of course, on the quality of the people running the fund. We run investments based on sustainability factors as an integral part of the value proposition and like everyone else we are judgedon that performance. Fortunately, we can demonstrate that they do add value!” In a specialist presentation, Sonia Medina, Investment Director, Climate
Change at the $4bn Children’s Investment Fund Foundation, one of the world’s largest philanthropic foundations, talked about the work the organisation does researching climate change impacts and advising governments as part of its mission around child development. She said the foundation was looking to talk with investors that are researching climate change and development impact. As RI reported last week, two thirds (67%) of voting attendees at one of the main plenary sessions at the conference said they believed that asset managers should integrate ESG criteria into their investment processes. The electronic poll was taken on a panel of heavyweight European asset management CEOs: Link
And speaking at the conference and via a subsequent statement, Vincent Neate, KPMG’s Head of Sustainability and Climate Change, warned that investment managers that fail to recognise both value-enhancing and value-destroying responsibility and sustainability issues could result in loss of custom, underperformance and an inability to cope with looming regulatory and societal expectations. “At present, responsibility and investment management are uncomfortable bedfellows. It is a hard-nosed, data-driven industry that still does not believe the growing evidence before it – that investors will vote with their feet if the industry doesn’t get up to speed on the issue of responsibility.” Neate added: “In order to thrive, investment management must become a more inherently purposeful industry, instead of contenting itself with weekend philanthropy or the outmoded CSR model of simply incorporating responsible activities into corporate brand and values, which is currently the mainstream approach in many industries.”