So if you question if Institutional Investors really do care are sustainability, responsible investing, environmental, social and governance (ESG) issues, then I think the article that was recently published by Institutional Investor magazine called “Influential Institutional Investors are Changing the Way they Invest” should be on your “to read” list.
The article pulls together the changes that we are seeing in attitude by Institutional Investors across North America. The article highlights how in July 2010, 150 people – fiduciaries representing some of the U.S.’s largest public pension plans, as well as corporate pension plans, sovereign wealth funds, university endowments and foundations found themselves at the Kennedy Compound in Cape Cod discussing the changing landscape in regards to Socially Responsible Investing.
The article goes on to talk about how the traditional model of “Socially Responsible Investing” which focused on screening out “bad” companies, simply didn’t fit into the investment approach of many institutions called Modern Portfolio Theory. However, the discussion seems to have shifted from screening out bad stocks to using Environmental, Social and Governance (ESG) factors to identify investment opportunities – a new pragmatism that I call Sustainable Investing.
The former CIO of CalPERS, now managing partner and chairman of the investment committee of Oak Hill Investment Management comments:
The question became “How do I find the long-term drivers that have a beneficial or positive impact on performance? That is a much more enlightened way to look at responsible investing. It is consistent with Modern Portfolio Theory.
The article goes on to highlight what the Caisse de depot et placement du Quebec is doing in this arena. Quoting Roland Lescure, the Chief Investment Officer,
For us, the financial mission and the non-financial mission go hand in hand. It is not a duty that we have on top of our financial responsibilities. It is both a risk management and performance enhancing tool.
The article continues by talking about the number of signatories that have signed onto the UN Principles of Responsible Investing (PRI) and that to date $22 trillion in capital have signed on. However, they address the issue that not all signatories live up to or even publicly disclose what they are doing under these principles. Not to be deterred, Vinay Nair, a former finance professor at Wharton and an adjunct professor at Columbia Business School, points out that even if a small percentage of signatories act on their convictions, it will have a material impact on the market value of companies that those investors deem good or bad actors — what he calls the “capital flow” effect.
Some back-of-the envelope calculations reveal numbers that are quite striking. He estimates that if an additional 5 percent of the total available capital is allocated to sustainability in the equity markets over the next three years, companies that are recognized as “good” will outperform “bad” ones by 3 percentage points annually.
Without going too deeply into the article, my sense is if you a sceptic and question what direction the marketplace is moving, you should read this article earlier versus later. The thinking that’s being reflected in this article is definitely taking hold in various jurisdictions around the world. The world of business and the world of investing is in the process of changing!