Dilemmas in Responsible Investment Céline Louche
A definition An investment strategy which objective is to generate both financial and sustainable value The constructing and managing of investment funds through the use of social, environmental, and governance considerations in addition to conventional financial criteria 2
What is Responsible Investment? Every time you invest, your money is doing two things: It is working for you financially It is capitalizing the corporations that are creating your future There is no avoiding the fact : All investments are doing both all the time. 3
Characteristics - Common themes Value Values Integrating ESG with financials Avoidance of societal and environmental risks Enhancement of rewards Avoidance of unacceptable behaviour Promotion of fairness, justice and sustainability Positive influence on corporate behaviour Long Term value creation 4 4 XX-XX-20XX
Characteristics Key identifying features Stakeholder perspective Participatory and cooperative Long Term perspective Societal and financial interests indistinguishable if you look out far enough Broad definition of materiality Relevance along multiple vectors
6 Historical context
History Five phases of RI Roots Development Transition Expansion Mainstreaming
History Roots, Pre 1970s Driven by religious organisations Who shun unethical activities (alcohol, gambling, tobacco) Create some well known funds (Pioneer, Templeton) 8
History Development, 1970s to late 1980s Growth from political protests of that period Inclusion of environment, peace, civil rights, social justice South Africa Primarily United States and United Kingdom
History Transition, Early 1990s Introduction of concept of sustainability Emphasis on positive aspects Emergence of social rating agencies
History Expansion, Early 2000s Support of concept of CSR by European Governments Increasing professionalization Growing recognition by the mainstream Launch of GRI Increasing participation by institutional investors Notably State Pension Funds
History Mainstreaming, Late 2000s Global interest at highest level Major alliance of institutional investors Principles for Responsible Investment Involvement of Sovereign Wealth Funds, Government Pension Funds, Global Stock Exchanges -900 of the largest institutional investors and asset managers worldwide - $25 trillion under management 12
To summarise Designation Dominant logic Dominant actor(s) Dominant practice(s) Geographical spread Before 1970s 1970s 1980s 1990s 2000 2006 2006 and Beyond Roots Development Transition Expansion Mainstreaming Ethical investment Moral and ethical grounds Faith-based institutions Avoidance Essentially the United States Socially responsible investment Green funds; socially responsible investment Sustainable investment; bestof-class investing; triple-bottom-line investing Responsible investment; ESG Political grounds Sustainability/environmentalism Professionalization Mainstreaming Individual shareholder activists Shareholder activism United States; Europe (mainly the United Kingdom) Retail investors Institutional investors Mainstream investors Inclusion Best in class Integration North America; Europe; Asia; South Africa; Australia and New Zealand; Middle East 13 XX-XX-20XX
To buy or not to buy... That is the question Cases 14
You are the manager of an RI fund. Ten years ago you sold out of your portfolio a large, successful retail company that was criticised for a series of abuses. For years the company showed no interest in corporate social responsibility (CSR) and became the subject of a worldwide antibusiness campaign. However, in the past two years, the company s leadership has decided to make CSR a top priority. Environmental and other activist groups still criticise this company and say it hasn t gone far enough for a company of its size and influence. You are being asked to reconsider the company. What would you do? 15
When a company change What happens when a company with a reputation for good or bad behaviour appears to change? How can one identify meaningful societal or environmental change in a company s record? When should responsible investors add or remove a company from their portfolios in response to such changes? 16
When a company change 17
When a company change Evaluate carefully the facts available from the company and the assessments of these facts by various stakeholders in the corporation Keep an open mind on the possibility that a firm can genuinely change for the better or the worse, despite firmly entrenched perceptions by the public one way or the other Be clear and consistent about what indications of change should be considered most meaningful Recognize that judgments made in these situations may turn out to be wrong and be prepared to change your decision in the light of new information Communicate clearly and thoroughly with all parties on the reasoning behind any actions taken in these cases 18
You are a money manager with a long-term RI client very concerned about human rights issues. The client, Mr Jones, calls you and explains that he has just read an article in the paper that says that one of the companies you have put in his portfolio Company X, a manufacturer of electronic games has been contracting with suppliers in China that have horribly abusive labour conditions. Your client is passionate about human rights issues and impatient with any company that has a record of abuse in this area. He is outraged by the report and wants you to sell the stock immediately. The situation is complicated, however.. What next steps do you take? 19
Ethics and facts Is there a legitimate role for ethics/emotions in responsible investment? What is the relationship between ethical concerns, hard facts and emotional responses? What role should ethics/emotions play when facts are not entirely clear? 20 XX-XX-20XX
Event Sources of information Type of client Companies reactions General context Emotional reaction Communication Investors Companies NGOs Media Government 21 XX-XX-20XX
Ethics and facts Build communications into the various aspects of the decision making process with clients and corporations Be certain to have all the facts and figures and understand their significance and context Understand the motivations and positions taken by the full range of stakeholders Assure that current research methodologies and the key performance indicators that are used are sound Give the company adequate time to respond to any requests for further information or explanation 22 XX-XX-20XX
You are the head of the research department of a major European bank. Your sustainability research analysts, Sarah, has been reviewing the CSR records of 30 European software, semiconductor and electronic equipment companies. - 10: well-known firms, complete CSR reports, press coverage. - 10: medium-sized firms, moderate amount of CSR information, reasonable press coverage. - 10: smaller firms, no CSR information, no information in the press. But, you know from an informal source, that one of these companies has taken some very innovative CSR initiatives recently. Sarah does not know what recommendation to make about these companies. She comes to you for advice. What would you advise Sarah to do...? 23
Incomplete societal and environmental data What should RI investors do when faced with incomplete societal and environmental data? Can an evaluation be made with information that may appear incomplete? Should smaller companies with less societal and environmental information available be assessed differently from large companies? 24
Case Incomplete societal and environmental data
Incomplete societal and environmental data Be certain to have all information that is reasonably available given the time and resources available. Distinguish between situations in which information on companies is incomplete and situations in which no substantive positive or negative information is to be had at all. Encourage greater disclosure by smaller firms. Assure that decisions on companies for which the information in hand is minimal are consistent with the fund s stated methodologies and are made consistently. 26
You are a money manager with a client that is a large environmental foundation investing according to RI principles. The chairman of the foundation, Mr Thomas, contacts you and says the foundation s board is unhappy with the environmental records of two chemical companies. It wants to influence both companies to improve their environmental practices. Company A: willing to talk ; Company B: not willing to talk. Both companies are moving slowly towards improvements, but not fast enough. The foundation is willing either to sell its stock or to enter into dialogue with the companies What steps would you recommend that the foundation take? 27
Influence through voice and exit How can responsible investors best influence company s behaviour? When and how does selling the company s stocks become the best option? When and how is entering into dialogue with a company become the best option? 28
Influence through voice and exit 29
Influence through voice and exit Determine the point of maximum leverage and influence with the company Be prepared either for a public confrontation with the company or for a less public engagement that can stretch over a long period of time Be clear and transparent about your engagement policies with your clients and with the companies involved Make appropriate use of both the exit and voice approaches as circumstance dictate Act proportionally to the seriousness of the situation 30