Fiona Reynolds: Is Responsible investment going backwards in the US?

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The recent CalPERS board election has led some to see this development as a major setback for ESG, but is that really the case?

Over the past month, quite a bit has been said about the election of a new board member to CalPERS – as if this single act of electing one individual to a pension fund board is going to stop the growth of responsible investment across the globe or at the very least across the United States. First off, let me congratulate Mr Perez on his election to the board, we continue to look forward to working with CalPERS as an active member of the responsible investment community.

Whilst some have stated that the election was won on the back of an anti ESG agenda, like many voting constituencies, Californian retirees have mixed views. I have spoken at several conferences across California, where retirees who are members of CalPERS and CalSTRS have turned up in large numbers to demand greater action on issues from climate change to gun control, many demanding that their pension funds act on these issues.

As far as beneficiaries go, the Californians seemed to be an active and engaged group. This is a good thing, we need actively engaged beneficiaries and personally, I really enjoy spending time talking to students or retirees who are engaged in dialogue about how and where their money is invested. I only wish there was more of it. More engagement from pension fund members can only be a positive development.

In addition, of course the State of California is quite progressive on issues involving responsible investment. The government recently passed new legislation that requires both CalPERS and CalSTRS to manage their climate related financial risk as well as regulation to require women on boards. CalSavers which launches to all eligible employers in July 2019 is predicted to grow to $98 billion over the next 15 years and has gone to market with an RFP for an ESG option. Far from going backwards, California is one of the most progressive economies when it comes to dealing with climate and other responsible investment issues. I of course recognize that California is not representative of the whole of the United States, but it is the world’s fifth largest economy.

A good indicator of how far responsible investment has come in the US, could be found in a recent FT article, in which Larry Fink, the CEO of US headquartered fund manager Blackrock stated that responsible investing did not mean investors had to sacrifice returns, adding that the group’s in-house research department was working with MSCI, to produce quantifiable data backing up that view. “We are going to see evidence over the long term that sustainable investing is going to be at least equivalent to core investments. I believe personally it will be higher,” he said. These are words we didn’t hear from the bulk of the mainstream US funds management industry as little as five years ago and whilst I am the first to admit that there is still a long way to go until all investment is responsible, we must recognize that there has been a shift in the debate and in the tone from the top of the investment community.Part of the recent commentary also discussed the PRI’s strategy in the U.S. and suggested that the recent CalPERS board election was a repudiation of that strategy- as an organization, we always welcome input and ideas on how we can do more to mobilize the investment community and how we can make responsible investment relevant and accessible to people. PRI is after all an organization of investors for investors and we want responsible investment and being a signatory to the PRI to be far more than just a tick box exercise, which is why we have developed new minimum requirements and a delisting process for those who fail to meet our minimum standards.

A few things to note however: in the US, we have seen our asset owner signatory base grow from approximately 20 to more than 40 in the last few years and far from avoiding the “fly-over” states, we have spent time from Chicago to Texas trying to advance responsible investment and address the common misconceptions that still exist in some quarters that responsible investment is about giving up returns for social good or somehow against a pension funds fiduciary duty. In recent months, we have been pleased to welcome the Chicago City Treasury and the Illinois State Treasury as signatories to the PRI.

On the downside however, and where we are concerned for responsible investment in the US is around the fundamental issue of shareholder rights with our focus squarely aimed at their protection. As it currently stands in the US, the SEC is considering several possible regulatory changes to the proxy voting process with the SEC holding a formal conversation on “whether proxy rules should be refined” at an upcoming roundtable on the proxy process. Topics for discussion, and possible regulation, include giving individual retail investors more authority to dictate their votes, increasing the thresholds for minimum ownership to submit a shareholder proposal, and limiting the ability to resubmit a shareholder proposal, among others. Although the outcomes of the discussion are uncertain, regulatory changes are likely.

SEC Chair Jay Clayton has publicly stated his support for changes to the proxy voting process. Notably, the SEC recently broke from protocol by rescinding two guidance letters on proxy voting.

Shareholder rights have been hard fought for across the US and they should not be given up lightly. Active Ownership is at the heart of Principle 2 and core to the work of investors. It is by business and investors working together that we can make a difference in advancing responsible investment issues and bring about tangible benefits for beneficiaries – the hard-working men and women working in corporations and saving for their future via their pension funds.

In this regard I agree with the commentary that we need to connect more effectively with workers and beneficiaries, those whose money we manage. If there is one thing that we can all take from the current polarization that we are seeing in many parts of the globe, is that many people feel left behind and believe that the system, including the financial system does not work for their benefit.
From my own perspective, I have worked in the finance and investment sector for the past 25 years and my mission has always been about how to make the financial system work in favor of the many and not the few. I truly believe that responsible investment and the integration of ESG issues is the best way to do this and that we need to align people, profit and planet. As we know one does not need to come at the expense of the other.

We also know that to bring about change that we must deal with all levels of the decision-making chain, whether that is engaging with the U.N., G20, National and Regional Governments, States, NGO’s, Unions or grass roots organizations, change is slow, often far too slow with vested interests often in the way. Face to face engagement is critical and it’s not all just about “hanging out with UN types” it’s about how to get action, how to affect meaningful long-term change. Change that makes a difference in people’s lives.

As we all know when it comes to responsible investment social issues have often received short shrift from some investors due to the lack of quantifiable data in the market on how these issues can affect financial performance. But this is improving, albeit slowly and at the PRI, we are trying to focus more attention on social issues, issues such as modern slavery, human rights, labour rights and income inequality.

Although the causes of inequality are many and varied, with TIIP we have just released a new piece of guidance on some of the drivers of inequality focusing on three themes well-suited for institutional investors: employee relations and the labour market, corporate tax policies and practices, and CEO compensation. Its guidance we hope all investors will take and incorporate into their responsible investment activities.

Additionally, working with the Grantham Research Institute, the Initiative for Responsible Investment at the Harvard Kennedy School and the International Trade Union Confederation, we have developed guidance on how to deliver a Just Transition for workers as the world moves to a low carbon model with the aim of ensuring that workers, families and communities are not left behind in this evolution.Investors have role to play in this discussion and need to expand their thinking when it comes to stranded assets, as stranded assets are not just physical they as also people and communities.

In the PRI 10-year blueprint for responsible investment, we have clearly stated that our aim over the next decade is to create responsible investors working in sustainable markets and contributing to creating a more prosperous world for all – this is our mission and reason for being. It is clearly not enough for pension funds to just manage money for their members, providing retirement income is a given – that’s their job, but as investors we need to think more holistically and to also consider the world into which people retire.

Business and investors need a strong social licence to operate as at the end of the day, we all live in a society and the economy and the financial markets that sit within them are part of our society not the other way around.

To end with a few words from our newest US signatory, Kurt Summers, Chicago City Treasurer on the announcement that they had signed the Principles for Responsible Investment and commenting on our inequality work–

He said “…On inequality, I grew up on Chicago’s south side, crossing gang lines every day to get to school just to get an education. I lived in a community stymied by economic disinvestment, so these issues are very personal to me ..by integrating ESG issues into 100% of our investment we believe that the choice between returns and impact are not binary, we can and must do both.”

Now that to me, is real tangible progress.

Fiona Reynolds is CEO of the Principles for Responsible Investment.