RI ESG Briefing, October 15: Evidence for the ‘CalPERS Effect’ as selected firms outperform

The latest environmental, social and governance news

Environmental

M&G investments, the £253bn (€316.9bn) asset management arm of the UK’s Prudential Plc, has agreed a £29m (€36.2m) finance package with Primrose Solar for four UK solar farms. The inflation-linked financing is repayable over 18.5 years and is “provided by M&G’s clients seeking secure cash flows over the long term”. The financing is secured against the farms, with a total installed capacity of 39MW, that have been operational since March 2014 and are located in Glamorgan, Norfolk and Dorset. Tim Huband, Head of Project & Infrastructure Finance, M&G Investments, said the deal “injects long-term institutional financing” into the emerging solar power sector.

The ambitious Sahara photovoltaic project Desertec has all but collapsed now that its biggest backers, namely Munich Re, Deutsche Bank and Swiss engineering firm ABB, have pulled out. Desertec’s main backers announced their intention to quit the consortium tasked with realising the photovoltaic project at a meeting earlier this week in Rome. The consortium, known as Dii, said it would continue as a service company for energy projects in the Sahara done by its three remaining shareholders, including RWE of Germany, ACWA Power of Saudia Arabia and China’s SGCC. Under the original plan, which was most actively promoted by Munich Re, Desertec was to meet 15% of European energy demand by 2050. The costs of the massive photovoltaic project were put at €400bn. Link

Cecilia Reyes, Chief investment officer of Zurich Insurance, has said the integrity of the burgeoning green bond market is at risk unless a clear definition of what passes for green can be agreed. Speaking at the Reuters Global Climate Change Summit, she was quoted saying: “In capital markets, trust is key. If there is going to be a lot of ‘green washing’, this market will die.” Zurich recently doubled its proposed investment in green bonds to $2bn.

Social

The Sustainable Stock Exchanges (SSE) initiative has hosted its fourth ‘Global Dialogue’ at the United Nations Conference on Trade and Development’s (UNCTAD) World Investment Forum in Geneva. The SSE 2014 Report on Progress was launched, reviewing sustainability initiatives at 55 exchanges. The report found “substantial progress, engagement, and a set of emerging best practices” among exchanges. However, it also recognized the “clear potential” for the sector to do more. The report notes that many recent supportive developments in the policy and regulatory landscape, and highlights practical measures that policy makers and stock exchanges can take to promote sustainability, even in the face of systemic obstacles to sustainable capital markets. Link. Governance

The California Public Employees’ Retirement System’s (CalPERS) engagement with companies and management on corporate governance matters continues to improve stock performance, CalPERS Investment Committee was told this week. Approximately 188 companies selected by the $293bn fund, the largest in the US, publicly and privately since 1987 on average outperformed the Russell 1000 by 14.4% over the five years after CalPERS began engagement, commonly referred to as the “CalPERS Effect.” The companies lagged the index by nearly 39% in the three years prior to CalPERS involvement. “CalPERS’ approach to improving portfolio returns by engaging the management of poorly performing companies to rethink their governance and strategy continues to work,” said Wilshire Associates, the fund’s primary consultant, in a report to the Committee. “The evidence is equally clear that many corporate assets are poorly managed and that resources spent on identifying and rectifying those cases can create substantial opportunity and premium returns for active shareholders.”

The Children’s Investment Fund, the UK activist hedge fund, has reportedly abandoned its campaign against Coal India by selling its stake in the state-backed mining firm. The Financial Times, citing “people familiar with the matter”, said the move marks the end of a dramatic episode of shareholder activism the country, after TCI – headed by philanthropist Chris Hohn – launched a raft of court cases against company management two years ago.

Barmenia, a German midsize insurer with €10.4bn in assets, and Verka Kirchliche Vorsorge, a €1.8bn German ecumenical pension fund, are among the latest signatories to the Principles for Responsible Investment (PRI). Barmenia said that it had been a sustainable investor for several years, citing exposure to renewables as well as stocks and bonds deemed sustainable as examples. It was not more specific. Other notable financial institutions that have signed the PRI recently are: Nordea Life & Pensions; UK real estate investor Cordea Savills; and Ownership Capital, the Dutch asset management boutique launched in early 2013 by Alex van der Velden, the former Head of Responsible Equity Investments at Dutch pension investment giant PGGM.

Jim O’Neill, former Chief Economist at Goldman Sachs, is among a strong set of speakers at the Local Authority Pension Fund Forum’s annual conference in Bournemouth, southern England from December 3-5. The theme of the event is ‘Productive Investment: public funds and public purpose’ and other prominent speakers include former Deputy Prime Minister Lord Michael Heseltine, the PRI’s Fiona Reynolds, James Hoffa of the International Brotherhood of Teamsters, and Cherie Blair of Omnia Strategy.