Editor’s comment: How the Pope, the Prince and the people of Norway are pushing RI forward

If you spend time (as I’m sure you do…I know I do) frustrated at the lack of broader discussion on the serious financial, environmental, social and corporate governance (ESG) issues that we as a community engage with, then take heart from some papal convening, a bit of royal intervention from the UK and some enlightened political debate from Norway. First up, last week’s Pontifical Council for Justice and Peace’s Day of Reflection on September 7th on environmental and social questions relevant to the mining industry! Speaking on behalf of Pope Francis, Vatican Secretary of State Cardinal Tarcisio Bertone, told the gathering of the world’s largest mining companies and NGOs: “The great challenge of business leaders is to create a harmony of interests, involving investors, managers, workers, their families, the future of their children, the preservation of the environment on both a regional and international scale, and a contribution to world peace.” Amen to that.
Link to story
Next, I’d recommend a morale-boosting read of HRH Prince Charles’ recent speech on the role of investors and, in particular, pension funds, in the move to a sustainable economy (that’s right, you heard me correct…) It’s a clear sign that what happens in the RI world garners the highest attention.
You can find it here
My attention was drawn to the Prince’s breezy enthusiasm on the investment strategies necessary to effectively manage the sustainability challenges unfolding around us: (I’ll leave the royal accent to you…)
Addressing the pension fund community, he said: “Perhaps I could suggest three easy steps you might like to consider taking? Firstly, might you widen the scope of existing risk analysis in order to capture some of the systemic links between risks? Secondly, following on from that, could you reflect these links in your valuation methodologies and the way you allocate capital? And thirdly, and perhaps critically, could you require asset managers to integrate environmental and social issuesinto the mainstream of their operation, and then measure their performance accordingly – and, incidentally, also explore new classes of asset that are more suitable in a sustainable economy?”
He’s right, of course. But it all sounds so much easier when you have blue blood…
Back to earth with a bump then, albeit a pragmatic, detailed, discursive one from Norway where two stimulating resumés of events held just before the summer by the Norwegian Ministry of Finance’s 2013 Strategy Council, have just been published on-line. The events presage the publication of an update report later this year on responsible investing for the Norwegian Government Pension Fund Global (GPFG), ten years after it first introduced its ethical policy. Professor Elroy Dimson of Cambridge University Judge Business School and the London Business School (and a member of the Norwegian GPFG Strategy Council), chaired the first summit held in Cambridge, UK. The resumé by Mitch Towner of the University of Texas at Austin, Department of Finance, can be found at the following link It is required reading for anyone wanting an outline on where RI is at today, especially the ‘intellectual framework’ connecting investment decisions of large asset owners and managers with environmental, social and governance (ESG) issues. My attention was drawn to the work of Professor Luc Renneboog of Tilburg University who discussed the empirical results from two papers on SRI fund performance (yes, that old but crucial perennial…). Renneboog tested two hypotheses: that SRI funds would be expected to underperform because of their reduced investment set due to negative screening; and that alternatively that the SRI funds would be expected to over-perform because of better governance and awareness. He compared the performance of 440 SRI funds from 17 countries with over 16000 conventional funds between 1991-2003. You can read the findings for yourself, but it’s worth underscoring the results: that in

many countries, both SRI funds and conventional funds tend to underperform the market. That’s slightly depressing perhaps, but for fund management more broadly rather than SRI. As many have argued, some RI funds perform well, some less well; just like mainstream investment funds! Professor Laura Starks of the University of Texas-Austin’s research on the type of activist engagement that works also caught my eye. Her conclusion: private activism appears to be successful, public activism has mixed success, and there has been little success to date with public engagement on social and environmental issues. Roger Urwin of Towers Watson – in something of a reality check to Prince Charles – noted that currently, 95% of asset managers have traditional financial goals, while only 5% are integrated with sustainability issues (typically large universal owners). He said that to make improvements in responsible investing required unifying investment beliefs and purpose to point finance in the right direction. This, he said, entailed the cooperation of society, asset owners, governments, and companies. Measurement and evidence were critical, he noted, while noting that very often the ‘counterfactual’ was not put forward, cheapening the intellectual case for RI. Looking more closely at GPFG and large pension/sovereign funds, David Pitt-Watson, Executive Fellow at London Business School, noted that as universal owners with a long-term perspective, the returns from beta were what future generations would ultimately rely on for their retirement benefits.
The GPFG now owns an average 1.3% of every listed company in the world! To this end, the review bySarah Takaki of the University of Cambridge, Judge Business School of the second Norwegian event, held in Oslo, is a fascinating look into various stakeholder perspectives (NGOs, beneficiaries) on the responsible investment strategy of GPFG. An interesting point raised by Professor Dimson chimes with Urwin’s point on the need to look at the ‘counterfactual’ to raise the level of debate. Dimson said research showed that the response of financial markets to “good” or “bad” corporate behaviour is more nuanced than some commentators suggest. Bad corporate behaviour, he said, may be accompanied by inferior investment performance while markets learn about the company’s conduct, followed by superior expected performance as compensation for the downside risk of the firm’s shares. Similarly, responsible corporate behaviour may be accompanied by superior investment performance while investors come to appreciate the merits of a company’s behaviour, followed by inferior expected performance after the market has elevated the share price. The Norwegian Ministry of Finance’s Secretary of State, Hilde Singsaas, said the forthcoming report would refine the GPFG’s responsible investment strategy and align it with and contribute to best practices in the area. As the Norway reviews show, the answers don’t always make for comfortable or easy reading, and nor should they. But Norway, as ever, is having this most necessary and important conversation in an adult fashion. It will be interesting to see where this debate goes given the election this week of Norway’s new centre-right leader Erna Solberg. Shame on other countries though for sticking their heads in the sand.