Institutional investors across the globe are becoming more aware of the environmental, social and governance effects both of, and on, their investment choices.
What is also clear is there is no one-size-fits-all response to addressing this awareness, and some executives say the theory is not necessarily translating into practice.
“We are seeing some asset owners think very clearly about what they invest in, particularly endowments and foundations and religious organizations, as these tend to be more mindful of the ethical nature of their investments,” said Jane Goodland, London-based senior investment consultant at Towers Watson & Co. (See related story at www.pionline.com/esgextra.)
One example in the U.K. is the Church of England's £6.1 billion ($10.5 billion) investment fund, whose investment restrictions were tightened last month by the church's Ethical Investment Advisory Board Group. The advisory board reduced revenue thresholds to 10% from 35% on screening out companies on account of their involvement in tobacco, gambling, high-interest-rate lending and human embryonic cloning.
“We reviewed whether it was appropriate to have these thresholds, and decided that 10% was more appropriate,” said Edward Mason, London-based secretary to the Ethical Investment Advisory Group. “We took into account that screening is more sophisticated, that we can get more granular data on the companies and revenues on the activities that we are trying to avoid.”
Mr. Mason said the EIAG and national investing bodies always assess the investment impact of proposed restrictions. The tightening of these screens has, he said, resulted in additional companies being excluded from investment, but the impact “was not judged to be likely to impact on the investing bodies' ability to achieve their investment targets.”
But most institutional investors do not have such strict policies.
“The majority take a fiduciary approach,” said Jane Ambachtsheer, partner and global head of responsible investment at Mercer Investments in Toronto. She said stewardship is a part of ESG, with the first code in the U.K. and “six or seven more across the world” that aim to enhance the engagement between money managers and companies — not only promoting the idea of good stewardship and responsible investment, but also helping improve the long-term returns delivered to shareholders.
There are also initiatives to push Ontario-based institutional investors to disclose their statement of investment policies and principles, with the government announcing proposed regulations in April for Ontario-registered pension plans.
“It is soft-touch and I believe it will function as a catalyst to get other investment committees to focus on this,” said Ms. Ambachtsheer. The regulation is expected to be effective in January.
But one consultant said that, for the increased conversation on the topic over the last year or so, the numbers are not a reflection. “(ESG) is a topic we have been speaking to trustees about a lot more,” said Ciaran Mulligan, global head of manager research at consultant Buck Global Investment Advisors in London. “We all know the benefits of ESG investment over the long term. However, in practice, the amount of direct ESG mandates that we have seen trustees invest in is perhaps not reflective of the talk. There is not as much change to asset allocation policies as we would expect.”
“As the pressure continues, we will probably see a steady increase in the amount of (ESG) funds being launched in the U.S. and the U.K., and with that there will be new benchmarks too. But it is early days — although trustee boards will force fund managers down that road,” said Mr. Mulligan.