PRI in Person conference report: real world, material sustainability issues

This year’s PRI in Person conference in Montreal, Canada on September 24-26 made a notable effort to push its content into new areas of interest around ESG/financial materiality. Prior to the start of the conference proper, attendees were invited to the public sessions of the PRI Academic Conference (PRIAC). One presented two fascinating updates on traditional themes. Keith Johnson, head of the Institutional Investor Legal Services team at Reinhart Boerner Van Deuren, the law firm, argued that fiduciary duty in the asset management industry focused too much on what is legal rather than what is fair for pension scheme beneficiaries. A paper, titled “Fiduciary Society Unleashed: The Road Ahead for the Financial Sector” with Edward Waitzer, professor and chair in corporate governance at Osgoode Hall Law School and senior partner at Canadian law firm Stikeman Elliott and Douglas Sarro, associate at law firm, Sullivan & Cromwell, argues for a new era of trust-based fiduciary principles based on generational and societal ‘financial’ outcomes. Johnson said this might be achieved through a combination of soft law and better mutual rewards between companies and investors, such as a reduction of frivolous lawsuits or more balanced executive compensation. He said the PRI could be part of the co-ordination of a G30 group of 10 institutional investors, 10 corporate issuers and 10 intermediaries that would act as the ‘lead wagons’ for such a development.
Jay Youngdahl, an attorney and a trustee on the pension fund of the Middletown Works VEBA, looked at the hot topic of “How might responsible investors address the topic of income and wealth inequality?” that Thomas Piketty’s surprise best seller, Capital in the 21st Century, brought to the fore again this year. Youngdahl said there was serious relevance for investors because of the net results of inequality, which he said were slower economic growth, economic instability, rent seeking and political capture and social instability.The big picture baton was picked up by Nick Robins, Co-Director of the United Nations Environment Programme (UNEP)-organised Inquiry into the Design of a Sustainable Financial System, which will run for 18 months to mid-2015. Robins said areas being examined by the Inquiry included market failure, non-inclusion of environmental factors in externalities, information asymmetry and bottlenecks, policy blockages to green innovation, and accountability in governance. Part of the solution, he said, lay in what he called the Five C’s: ‘commitment’ at investor board level to PRI and to policy changes, clarity of message from investors, co-ordination, consensus among the multiple investor voices, and consistency.
Demonstrating all of the above in a rousing conference keynote, Christiana Figueres, Executive Secretary of the United Nations Framework Convention on Climate Change (UNFCCC), fresh from the UN Climate Change Summit of the same week, welcomed the PRI’s Montreal Carbon Pledge, unveiled at the conference, whereby signatories will disclose their carbon exposure with the aim of using the information to develop an engagement strategy and/or identify and set carbon footprint reduction targets. Figueres also noted the important commitment at the UN event by the insurance industry to double green investment to $80bn by 2015, then 10-fold by 2020.
Looking ahead to COP21 in Paris in December 2015, she said the meeting should aim for a sustainable framework for the economy for the next 30-50 years, and made three requests from PRI signatories to back it: “One: I want you to help me to scrub the lobbying practices against an ambitious climate strategy and commit to investigate whether everyone under your sphere of influence is being neutral or lobbying for this issue. Two: you as investors have access to ministries of finance in your countries, so
run this issue up the flagpole. Three: Sign the Montreal Carbon Pledge. The PRI has $22 trillion in assets, and the aim is for $3 trillion to be signed up, so what happens to other 19? Take it to $22 trillion!”
Some asset owners speaking at PRI in Person have taken up the challenge vigorously. The Chief Executives of AP4, Sweden’s SEK276bn (€29.9bn) government pension buffer fund, and ERAFP, the €15bn Paris-based French Public Service Additional Pension Scheme, both used the conference to call on governments to oblige public pension funds to publish their carbon footprints, with ERAFP saying its is lobbying the French government to do so before COP21. AP4 CEO, Mats Andersson said: “There is a serious risk that climate change could devalue a large part of our assets over the next 10-20 years and so we need to communicate this to our stakeholders.”
In his conference introduction, PRI Chairman, Martin Skancke, said a test for the organisation would be its ability to add value in areas such as investor engagement and assisting asset owners to be long-term in their work on longer-term investment mandates.
On a panel looking at the structural issues of the latter – often held up as a precursor to real integration of ESG issues into the risk/return considerations of investors – panel moderator, Helene Winch, Director of Policy and Research at the PRI, said a survey of signatories had revealed that 92% wanted the PRI to research how to overcome short-term market obstacles to ESG integration. Keith Ambactsheer, Director Emeritus at The Rotman International Centre for Pension Management, cited a number of successful investors such as Warren Buffett, or the Ontario Teachers Pension Plan (OTPP), which had demonstrated the strong returns rationale in long-terminvestment: “What’s the secret sauce at OTPP? Well, it’s a short, clear statement of its investment beliefs that they live by: being inter-generational with thorough risk budgeting, a belief that investment markets are not fully efficient over the long term, and a rigorous management of total costs. Personally, I’m tired of hearing about alpha and beta. Talk to me about investing in businesses, about management quality and sustainable company cash flow versus expectations!”
Daniel Ingram, Head of Responsible Investment at BT Pension Scheme Management, said investing for the long term was the fund’s aim, but noted that it needed liquidity to pay out to pensioners, and so was trying to balance different time horizons for different member profiles.
Ambactsheer said pension funds had two goals: long-term affordability and payment safety. He suggested that a solution to ensure a long-term investment horizon was to run two investment streams: one that never de-risks and another that looks after payment liquidity.
Another highly topical panel picked up the issue of how investors should respond to corporate tax planning, which has hit the headlines in recent months as governments and inter-governmental bodies such as the G20 and the OECD seek to clamp down on the exploitation of controversial tax avoidance loopholes. Matthias Muller, Senior SI Analyst at RobecoSAM, said
10% of companies making up the Dow Jones Sustainability Index had a clear statement of legal compliance on tax strategy, although 87% said they respected the respective tax laws in their operating jurisdictions.
Robert Wilson, institutional portfolio analyst at MFS Global, the US fund manager,
said the wiggle room between whether companies have a policy and how explicit it is represented an investment red flag: “Societal expectations are growing to view tax as a sustainability issue. We believe there is a real earnings question at stake, and therefore we need to do some company level risk analysis. For example, we look at the potential tax gap: the weighted average statutory rate, less the effective tax rate shown on a company’s income statement. Could this be the result of tax avoidance? We’ll engage with the company management team to find out, then integrate any riskinto our financial models: maybe make some valuation discounts, or look more closely at potential downside risk, or vary the weight of a company in our portfolio for large unexplained tax gaps.” Real world sustainability issues requiring serious investment analysis. As PRI Chairman Skancke, noted: “I know you get pushback in your organisations on issues like ESG integration. We hope you will be refreshed by the ideas and insights put forward on the issues here, and the contacts made with other professionals working on them.”