For some time now I’ve been an enthusiastic member of CRESGWAA – the Campaign to Replace ESG With Another Acronym. Surely we all know deep in our hearts that ‘ESG’ needs to go? When we try to ‘define’ it we usually need long, unwieldy paragraphs consisting of multiple sentences, or lists of disparate issues that struggle to sit comfortably together. (Can you explain to me in fewer than 50 words the link between Free Prior Informed Consent and mandatory auditor rotation?) Communication with ‘mainstream’ investors (and my next blog is going to be on CAUWM – the Campaign to Abolish the Use of the Word Mainstream) is usually easier if we don’t use the term ‘ESG’ but talk directly about ‘real’ underlying issues in terms of their implications for earnings, risk, etc.
Membership of CRESGWAA has been growing steadily. Most people I talk to seem to support it, even if they’re sometimes reluctant to say so openly (it’s particularly difficult if the term is in your job title, for example). But CRESGWAA’s main problem is that no-one has been able to agree on the ‘ask’ – OK, we’ll replace ‘ESG’; but what with??
And then in a blinding flash of insight and inspiration, at Responsible Investor’s ‘ESG 2.0’ conference in London last week, it came to me.
Xander den Uyl, a trustee of ABP, and Marcel Jeucken, Head of Responsible Investment at PGGM (the manager for PFZW), were talking about their respective funds’ new investment beliefs and responsible investment policies (those of two of the largest pension funds in the world, note). Antii Savilaakso of MSCI was surveying the landscape more generally and reflecting on market-wide trends among asset owners and asset managers. Suddenly I found myself scribbling two acronyms on my notepad: KWYO and KYC.
‘Know what You Own’ is not new. AP1 in Sweden has talked for a few years about ‘knowing what we own and wanting to own what we have in the portfolio’. This principle lies at the heart of ABP’s and PFZW’s new policies. These funds are moving on from the concept of ‘integrating ESG into their investments’ – in the sense of bringing a new ‘thing’ in from outside and incorporating it into the way they invest. Instead, their starting point is who they are and how they want and need to invest: what their beneficiaries are entitled to in the form of their liabilities; what those beneficiaries want and expect in terms of social responsibility; and how the funds view their wider role in financial markets and in society. Their approach is holistic – the way they address sustainability emerges organically from within; it is not thrust in artificially from outside. The principle is to Know What You Own – And Why You Own It: KWYO–AWYOI. Do we know how much carbon we ‘own’ in the portfolio? Why do we ‘own’ so much of it? Are we comfortable owning so many companies that are exposed to so many ESG (sorry) risks? Can we cut that number without harming our returns? And so on.Marcel Jeucken spelled out what the new agenda means for PGGM’s expectations of its external managers:
• systematic integration of sustainability into all investment decisions
• assessment of reputational risk (including incident reporting)
• application of PGGM’s exclusion policy
• active engagement to improve the ESG performance of portfolio companies or projects
• increasing investment with a positive sustainability impact within existing mandates, including impact measurement
• lowering the negative sustainability footprint, starting with CO2
• application of PGGM’s remuneration guidelines for external managers
• transparency on ESG, e.g. reporting templates such as the Global Real Estate Sustainability Benchmark.
That’s pretty demanding. What does it mean for asset managers?
KYC. Know Your Customer. Asset managers need to work hard to understand their customers. Not just in terms of benchmarks and basis points, but who they really ARE: what makes them tick, how they think, who their stakeholders are, what the business pressures on them are (e.g. reputation with members, expectations of important constituencies on their boards – such as trade unions). Not just where their heads are, but where their hearts are. Suggesting to a retailer that it needs to understand its customers would hardly be revolutionary. Now it’s time for asset managers to work harder at this element of the business basics. (And to be fair, the asset owners also need to work harder at communicating who they are, what they want, and why they want it to investment managers.)
ABP and PFZW may still be outliers in the distribution curve of asset owners. But as asset owners go, they’re pretty big, so this is a strong signal. And distribution curves don’t stand still. This one is moving; what the outliers are doing today, a lot more funds will be doing tomorrow.
So, my formula for sustainable financial markets and an investment chain that aligns interests:
[(KWYO+AWYOI) + KYC] >ESG
PS And don’t forget the other important acronym – OSDNFA – One Size Does Not Fit All. Asset owners are a diverse bunch.
Rob Lake is an independent Responsible Investment Advisor.