Cutting edge responsible investing topics, including whether investing in alternative asset classes can bring positive social impacts and measuring the success of investor engagements with corporates, were on the programme when researchers from SIRP, the Sustainable Investment Research Platform, a programme funded by Mistra, the Swedish foundation for environmental research, recently visited Paris to give presentations at Oddo Securities and Panthéon-Sorbonne. Presentations by Jaap Bos and Michael Viehs, both from Maastricht University, looked at the issue of the impact of investment from different perspectives. Bos pointed to the often overlooked fact that well intended impact investments in alternative asset classes may have unintended/unwanted effects because the ‘atomistic-investor-rule’, that says that investors do not have an impact on prices through their trades, does not apply as implicitly assumed. This can lead to adverse effects on returns, risks and diversification. Because of investor herding (such as in commodities), for example, or because of the fact that investors invest through the same channels, Bos concluded that too much focus on diversification gains is deceptive. Instead, he suggested that impact investors should think about ‘engagement’ as an alternative way to have an impact when going into alternative asset classes. This established a link to a presentation by Michael Viehs, who has studied how shareholder engagement can be a way for institutional investors to invest responsibly: “Investors can both exclude firms from portfolios on the basis of non-financial information and include based on positive/negative screenings concerning ESG quality. More specifically, engagement is a means for institutional investors to promote good ESG standards at investee firms,” said Viehs.He has investigated all shareholder proposals at S&P 1500 firms from 1997-2009 and the result shows that institutional shareholders are increasingly filing proxy proposals regarding corporate governance and corporate social responsibility. Perhaps not surprisingly, one of the main results Viehs presented is that institutional investors had filed fewer proposals than individual investors, but had been more successful. Notably, he said, institutional investors had been much more active when it comes to ‘corporate social responsibility (CSR)’ issues (1,244 filings vs. just 473 filings by individual investors), whereas it was the other way round when looking at ‘corporate governance’ issues (4,189 filings by individual investors and 1,115 by institutional investors). Secondly, in the most promising contribution of the research, Viehs showed the results of a not yet finished research study that looks at the outcomes of private dialogues between institutional investors and corporates as an alternative way of ‘voice engagement’.
This is a highly under-researched area due to the lack of available (proprietary) data and hence its results will certainly be of great interest to practitioners and academics alike. The preliminary results show that of the 3,675 engagement events in US firms analysed, 11.8% had been successful in the sense that the milestones that had been set by the investors’ engagement agent had been achieved. An interesting contribution from a methodological point of view was the event study type of analysis that has been conducted around engagement dates. With respect to the financial variables (sales, debt, net margin, EPS, etc.) no significant pattern had been detected – however, the methodology appears to be the
right approach, i.e. the impact on the behaviour and performance of the company with respect to the engagement topic itself. This should be the main line of further investigation, since is it not decisive what the agent defines as engagement milestones, but how the actual performance of a company changes as a result of the engagement. This is the impact one should look for and measure. It brings us back to Jaap Bos’ presentation: here it is not only important to stress that the diversification efforts of institutional investors into alternative asset classes have unintended effects from a financial risk management perspective, but also have unintended non-financial impacts due to the fact that biased market prices (be it for commodities or micro-credits) can generate significant external costs (e.g., fundamentally not justified food price increases) which should be unacceptable for a responsible investor. Bos said: “The most important difference is that investors, through their actions, are much more likely to affect returns, risk and diversification gains when investing in alternative asset classes. As a result, a successful SRI investment strategy should not just rely on exclusion and inclusion, i.e., investing in SRI champions.” Rather, he said, financial and non-financial returns could typically be maximized via engagement; by pursuing a close and pro-active relationship with their investments, investors are most likely to do well and do good. As an illustration, Bos showed that small, traditional microfinance institutions tended to outperform larger, (in principle) more profit-oriented microfinance institutions. In his conclusion, he emphasized the importance of benchmarking and said balanced scorecards, that show where there is room for improvement in firms’ performance, provided investors with a tool to engage in a focused and effective manner.It seems safe to assume that ‘impact’ and ‘engagement’ will remain among the hottest topics debated within the responsible investment community in the years to come, both from a practitioner’s and academic’s perspective. Two more presentations were given at Oddo Securities. Piet Eichholtz, Maastricht University, talked about the GRESB report and how green buildings can improve the financial performance in your portfolio. Lars Hassel, programme director SIRP Mistra presented how unethical risk behaviour of board members and top executives in listed Swedish companies in the past relates to the environmental performance and environmental reporting quality of the firm. “We would not rule out to have one board member that has broken the law, since that gives diversity to the board but when too many have an unethical history it becomes a problem,” said Hassel. Boards with a higher proportion of risk-prone, unethical members seem to focus less on the environmental concerns and expose their firms to greater environmental risks. Additionally, board members with a large stake of their total wealth invested in the company consider environmental performance costly, while a higher proportion of women on the board make the boards more concerned about the environment: “More female board members might be good for the company although you need to have more than one women on the board – at least three are needed – to have an effect,” Hassel said. Besides board structure and board member character, the profitability of the firm and the environmental risk of the industry are driving the environmental performance of firms, confirm the studies.
Elisabeth Nore is Communication Officer at SIRP Mistra and Hendrik Garz is Executive Director at WestLB AG