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

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

The CEO of the PRI looks at developments 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.

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