From intentions to implementation: the long ESG road
By Arti Prasad-Naidu, QIC
Posted: 11th May 2015 09:04
“Man does not live by bread alone” is among the most famous phrases in the globe canon. It conveys the deeply held belief that there is more to life than immediate material comfort to the exclusion of all other values.
Deeply held moral beliefs inspired anti-slavery movements in the 19th Century and in more recent times motivated the anti-apartheid movement and related divestment activism. However, the evolution of ESG shows that issues do not have to be super-charged by moral fervour to gain traction in the investment world.
Tough-minded, pragmatic investment leaders joined hands with the United Nations to develop the Principles for Responsible Investment (UNPRI) in 2005 and it shows. UNPRI signatories today manage more than US$30 trillion of assets, representing around 15% of the world’s total invested capital.(1) It’s easy to see why ESG is quickly becoming part of the investment mainstream: a fiduciary mind-set underpins ESG.
In that sense ESG is a step-change from SRI. SRI is laudable in many ways, but potentially sacrificing investment returns is a bridge too far for fiduciaries responsible for delivering the best possible long-term performance to beneficiaries. By contrast, ESG makes intuitive sense for investment professionals. It provides a framework for taking investors beyond the quarterly earnings cycle and towards investments that have staying power. ESG is about investing with the aim of achieving persistent returns.
Asset owners have liabilities stretching over decades and so abiding by principles that support long-sighted investing is common sense. There are a few obvious assertions that bear repeating:
- Environmentally responsible companies are more likely to be in business for longer, be more financially successful and have more community support than those that are environmentally cavalier
- Companies supported by the communities in which they operate are more likely to be in business for longer than those that antagonise communities
- Companies governed by boards of independent directors with deep relevant expertise are more likely to be in business for longer and drama-free than those led by directors with little relevant expertise or compromised by conflicts of interest, among other things.
In the early days of UNPRI, simply signing the principles was good enough. Clients and society at large, however, have moved on and raised the bar.
Serious implementation is what is expected. Investment firms like QIC are, as a matter of course, asked to show how we integrate the principles into the investment process and asset ownership.
A decade ago metrics barley existed that could help to integrate ESG into the investment process. They do today and investors are using them with increasing frequency and intensity.
Even if these emerging metric systems remain imperfect and incomplete, ESG-data is being aggregated at a fast clip. Bloomberg's ESG's database, for instance, now comprises 300+ ESG data points on 10,000 public companies (and increasingly on private companies too).(2)
B-Analytics, a rapidly expanding analytical tool for private companies to "measure what matters" has been used by over 8,000 companies and an increasing number of private equity managers, initially in the US, now also in Europe and beyond.
The World Business Council of Sustainable Development, with over 200 large corporate members, including all Big Four accounting firms, is leading an initiative in which Prince Charles' Accounting for Sustainability Project, will collaborate with the International Integrated Reporting Council (IIRC) "to make sustainable performance concrete, measurable, comparable.”(3)
QIC recognise that ESG integration works differently in the short and long term, and also across different asset classes. A one-size-fits-all approach is at best problematic, at worst a non-starter.
Real estate, private equity and infrastructure assets QIC owns on behalf of clients are illiquid and held for long periods. Attributes that make each different and distinct are more visible than their commonalities. Consequently, ESG factors are applied in a fit-for-purpose way to each asset class, while always remaining true to principles.
In a world where information has been democratised by digital technologies and the citizen journalist is now a reality, social media is a force to be reckoned with. The emerging campaign to ‘strand’ fossil fuels owing to climatic impacts is a case in point.
Campaigns to ‘strand’ fossil fuels have spread out from universities and around 200 institutional investors have joined the ranks. According to Novethic, those institutional investors have committed to fossil fuel free portfolios within five years, and 40-or-so have already set up an exclusion policy.
ESG considerations provide a mechanism for “de-emoting’ issues, like climate change and approaching them in a dispassionate manner.
After so much passion spent on the issue over almost a decade, Australia seems to be at an impasse on climate change policy. Nevertheless, Investors don’t have to be embroiled in the often polarised political conversation around climate change. Rather they are able to integrate ESG issues and address it through the risk-mitigation and investment return persistence lens.
Any good investment analyst will no doubt recognise such risk to their portfolio and when it becomes material, will reduce or sell the related position.
However, many scientists would say that both the investment and economic domains are still falling short when it comes to pricing risks involving the climate, water availability, soil quality and human health.
Rigorously pricing risks that the economics profession describe as ‘externalities’ can help to make the link between sustainable investment returns and general economic and social well-being. That’s really where we have to get to and where ESG can take us. It’s a big claim and ambitious goal, but one that’s achievable.
QIC Limited ACN 130 539 123 (“QIC”) is a wholesale funds manager and its products and services are not directly available to, and this document may not be provided to any, retail clients.
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Background on QIC:
QIC is a leading investment provider for sovereign wealth funds, superannuation funds and other institutional investors. QIC delivers to over 90 institutional clients in Australia and internationally.
Created in 1991 by the Queensland Government, Australia, to serve its long-term investment responsibilities, QIC has the heritage and insights to understand clients’ needs. QIC has grown to become one of Australia’s largest institutional investment managers with over A$70 billion (as at 31 March 2015) in assets under management. QIC has global investment experience and capabilities spanning private equity, infrastructure, real estate, fixed interest and multi-asset solutions.
Building on a strong foundation in Australia, QIC's global presence extends to the United Kingdom, Europe and the United States. For more information on QIC, visit www.qic.com
(1)Max Rutten, Founder and Principal, Helix Ventures LLC