This article forms part of CAER’s ‘Responsible Investment Agenda 2018 – A Work Plan for Australian and New Zealand Investors’ Report
As the responsible investment community grows and awareness of environmental, social and governance (ESG) factors increases, high-quality ESG research is paramount.
While no one wants to cherry pick a limited number of ‘trends’ to focus on in a silo – after all, responsible investment champions long-term, sustained awareness of ESG factors – it helps to sharpen our mind and focus on specific topics from time to time. CAER has produced our first Responsible Investment Agenda in 2018 to support our mission of broadening the reach of responsible investment through the provision of high-quality ESG research. We identified emerging issues that are of interest to both our analysts internally and those seeking updates on topics that will shape conversations this year. Sharing our insights with the broader investment community allows for healthy debate and enriched ESG risk integration.
We assessed specific ESG themes through a lens of broader changes taking place, largely driven by what many now call the ‘mainstreaming’ of responsible investment practices.
‘Mainstreaming’ forcing a step change in responsible investing
While responsible investment has been growing and reshaping financial markets for decades, we are now seeing a step change in the Asia Pacific and Europe. RIAA (the Responsible Investment Association of Australasia) reports that in Australia there are A$622 billion assets under management implementing responsible investment practices – up from less than A$150m in 2011. This means that RI managed funds now represent almost half of assets under management in Australia.[i]
In New Zealand, RIAA now measures NZ$131.3 billion assets under management with responsible investment strategies, an increase from just above NZ$20bn in 2011. [ii] Over the last five years, we have also observed a rise in the acceptance and usage of negative screens, with an increased frequency of tobacco and controversial weapons screens in particular. Other issues such as the phasing out of coal and other fossil fuels, or actively voting on ESG themed resolutions at AGMs are becoming increasingly accepted in the mainstream understanding of responsible investment.
Other key markets in our region pushing the responsible investment agenda are Japan and Hong Kong. The responsible investment community has been looking to Japan for a number of years now, as the Japanese market continues to be a fast moving and learning in terms of responsible investment approaches across all asset classes.
This is largely due to changes to the Japanese Stewardship Code[iii] as well as prominent moves by the world’s largest pension fund GPIF (Government Pension Investment Fund).[iv] We can also see an increasing interest from corporates to engage with international shareholders, which suggests the message around stewardship and ESG issues has trickled down to corporate issuers. Hong Kong has stepped further into sustainable finance through its green finance certification scheme, which will bring a new approach to green bonds and loans in Asia, including pre- and post-issuance progress measurements.[v]
In Europe, the High Level Expert Group on Sustainable Finance (HLEG), established by the European Commission, set strategic recommendations for a financial system that supports sustainable investments. A key recommendation of the HLEG is to embed the ‘Think Sustainability First’ principle at the heart of European policy-making. This emphasis may well set Europe at the forefront of driving financial system reforms that put sustainability and responsible investment at the centre.
Another demonstration of further integrating responsible investment with finance can be seen in a new initiative championed by Vigeo Eiris to include ESG ratings in conjunction with credit ratings in Europe. As part of the One Planet Summit in France, a number of financial institutions, including Amundi, Aviva Investors and AXA, made a declaration to invite corporate issuers to provide ESG ratings alongside their credit ratings.[vi] This move will take sustainability and ESG analysis from the sustainability department to the desk of CFOs.
Growth in Reporting Initiatives
The growing application of responsible investment strategies in investments was always going to open the debate about corporate reporting and disclosures. Without consistent, quality disclosures from companies, ESG analysis is always going to have gaps and be driven by assumptions, not facts. There is no doubt still a long way to go before responsible investment and sustainability reporting are at the same standard of disclosure (in quality, quantity and consistency) as financial reports.
We do however see demand for quality and consistency in information increasing, which is reflected in the growth of reporting initiatives such as the Taskforce on Climate-Related Financial Disclosures (TCFD) and mapping corporate reporting against broader international initiatives such as the UN Global Compact and the Sustainable Development Goals. We also observe a rejuvenated debate on integrated reporting (<IR>) as well as the Global Reporting Initiative (GRI). Companies are currently disclosing more ESG information than ever.
Mapping Investments to Universal Norms
The reporting by companies against international frameworks is increasingly mirrored by investors, who map their investments to the Sustainable Development Goals. Investors also continue looking to the UN Global Compact, which provides a typology of corporate behaviour against international norms.
This systematic mapping in investment processes is still in its early stages, with discussions on their usefulness and appropriate application starting to emerge. We can see an increasing sophistication in the way these universal norms are applied in both, portfolio construction and measuring the effectiveness of ESG integration in portfolios.
The Proliferation of Public Benchmarking
Given the overall amount of ESG information available, we also need to consider public benchmarking exercises, which have emphasised the importance of ESG reporting to companies and investors. They champion a ‘race to the top’ for companies, and have in turn resulted in the improvement of company policies, procedures and disclosures.
For example, initiatives like the Corporate Human Rights Benchmark encourage companies to mitigate and recognise human rights risk within their own operations and throughout their supply chain. Another initiative, The World Benchmarking Alliance, assesses how companies contribute to the Sustainable Development Goals.
Locally, there have been popular consumer based benchmarks that rank retail companies on their environmental and social track record (see for example Shop Ethical!), to whether they have provisions to support a living wage (such as the What She Makes campaign).
Increased Scrutiny of ‘Responsible Investors’
Growth in responsible investment and increased sources of information available also puts greater pressure on investors to be open and transparent about their responsible investment choices. External and internal stakeholders increasingly seek to understand and debate the outcomes of responsible investment strategies, such as portfolio holdings, engagement results, and proxy voting behaviour.
Increased requirements for the Principles of Responsible Investment (PRI) signatories means that investors can no longer jump on the ‘ESG/responsible investment’ bandwagon without undergoing the appropriate action and due diligence processes.[vii] Moreover, the PRI has formally announced its process for de-listing signatories in December 2017, which adds punch to the increased requirements.[viii]
In Australia and New Zealand RIAA’s Responsible Investment Certification Program allows retail investors to access detailed information about how each investment product takes into account ESG issues, in a standardised and consistent manner. The RIAA Certification Symbol Trademark provides consumers and industry with a ‘quality mark’. The presence of this quality mark can help demonstrate that prudent practices were undertaken in order to create a responsible investment product thus making it harder to get away with utilising ‘responsible investment’ language without following the appropriate processes.
Universities and councils that have implemented a responsible investment approach have also been under greater scrutiny from their stakeholders as to whether they have actually implemented the principles outlined in their public policies. We expect that this amplified scrutiny to also extend to superfunds and other institutional investors in 2018.
Overall, responsible investors will see greater demand for their products and an increase in available information. This will enable stakeholders to gain a broader understanding of topical issues as well as challenge irresponsible investment choices, making it paramount that investors are informed and prepared for these issues and how they may impact on their investments.
Explore each of these themes
Interested in discussing any of these issues further? Feel free to get in touch.
[i] RIAA, Australia Benchmark Report (2017): <https://responsibleinvestment.org/resources/Benchmark-report/Australia/>; and RIAA Benchmark Report (2011): <https://responsibleinvestment.org/wp-content/uploads/2014/08/RI-Annual-2011-Report.pdf>
[ii] RIAA, New Zealand Benchmark Report (2017): <https://responsibleinvestment.org/resources/benchmark-report/new-zealand/> ; and RIAA Benchmark Report (2011): <https://responsibleinvestment.org/wp-content/uploads/2014/08/RI-Annual-2011-Report.pdf>
[iii] Financial Services Agency, Japan’s Stewardship Code (Revised version) (29 May 2017): <http://www.fsa.go.jp/en/refer/councils/stewardship/20170529.html>
[iv] Government Pension Investment Fund, Stewardship Activities Report (2017): <http://www.gpif.go.jp/en/topics/pdf/20180223_stewardship_activities_report_in_2017.pdf>
[v] Hong Kong Quality Assurance Agency Press Release (03 January 2017): <http://www.hkqaa.org/cmsimg/1514953363HKQAA_Green%20Finance%20Certification%20Scheme%20Press%20Release_EN.pdf>
[vi] Vigeo Eiris Media Release (08 December 2017): <http://www.vigeo-eiris.com/wp-content/uploads/2017/12/20171208_Declaration-towards-a-wider-application-of-non-financial-rating-081220….pdf?x60030>