Leading a broad church

The days when SRI was the preserve of a few ageing trade unionists and church pension funds are long gone. A new, more pragmatic approach to responsible investment is emerging that unashamedly champions higher returns while promising to help drag the global financial system out of the mess it’s in.

Leading the charge is James Gifford, an erudite Australian who helped to found and now heads up the United Nations’ Principles for Responsible Investment (PRI) Initiative. ‘Responsible investment probably wouldn’t have prevented the financial crisis but it would have mitigated the damage,’ he explains over a beer in the lobby of Singapore’s Carlton Hotel. ‘Some of the scandals we’ve seen were simply frauds. A lot of the behavior that led to this crisis, however, was short of criminal but still highly unethical, very short term, deliberately opaque and deceptive.

‘The processes encompassed in the PRI – deeper due diligence, enhanced analysis, better research, and a much closer look at the ethics of company management – would have picked up much of this behavior at an earlier stage.’

Tiny acorns
The PRI came into existence in 2005 when Gifford, who was then working for the UN Environment Program’s Finance Initiative in Geneva, started talking to a group of institutional investors about fashioning a set of key principles that would make markets work more efficiently while leading to better social and environmental outcomes.

Since its formal birth in 2006, the PRI has grown from 40 to 450 signatories, representing $18 tn before the market slump of 2008 (the PRI is currently completing its latest annual survey, which will reveal the extent to which signatories have suffered during the downturn). Signatories range from pension funds that have always placed a high value on corporate governance and sustainability, like CalPERS and the BT Pension Scheme, to mainstream fund managers such as BNP Paribas and Fortis.

In recent years, companies and investors have come under growing pressure to take account of environmental, social and governance (ESG) issues from a broad array of politicians, NGOs and other well-meaning campaigners. Many investors believe the last thing the financial community needs right now is yet another body telling it what it can and can’t do.

But the PRI, which Gifford runs with the help of just 11 full-time staff, is more of a market-focused partnership than a preachy environmental lobby group. ‘Our principles were written by the institutions themselves and the PRI is driven to a greater degree by the asset owners than by the UN,’ he explains. ‘The UN does believe, however, that the management of ESG issues through active ownership and greater transparency will not only produce better returns but also have real, positive implications for human development, environmental sustainability and the fight against corporate corruption.’

Spreading the word
The potential for responsible investment to make a difference is greater in less developed markets, which is why, having established a critical mass of support in Europe and the US, Gifford is turning to Asia. 

‘We would argue that being a responsible investor and encouraging companies to have better corporate governance is just as – if not more – important in markets like Indonesia, Malaysia and the Philippines than in western Europe,’ he says. ‘The potential to add value for corporations and shareholders is greater in those markets where companies don’t have such good corporate governance or environmental management in place.’

Gifford is in Singapore for the second leg of an Asian tour designed to raise awareness about the PRI and increase the number of signatories from Asia. He’s already addressed a gathering at the stock exchange in Jakarta, where he charmed the audience by opening his speech in Indonesian, which he learned at school in Australia. After hosting a discussion at Singapore Exchange, he’s off to Bangkok and Kuala Lumpur before heading back to his base in London.

‘Outside of Japan and South Korea we’re still very much in the early stages in Asia,’ Gifford admits. ‘We plan to come back regularly but we have a pretty small secretariat so we rely on local partners such as the Government Pension Fund of Thailand and various local SRI consultancies.’

Gifford, who owns a bicycle instead of a car and offsets all the carbon emissions from his flights, has just completed a PhD in shareholder engagement at the University of Sydney. He first became interested in the subject while working at the Wilderness Trust, an Australian environmental lobby group, where he filed AGM resolutions designed to stop unsustainable logging activities. After taking a masters degree in environmental management, he became convinced activism by mainstream shareholders was the best way to encourage a sustainable approach to the environment while also generating better returns.

Despite the financial crisis, he remains convinced responsible market capitalism is the key to ensuring a sustainable path to prosperity and believes investors can be key agents of change.

‘Regulators can force firms to do things but they’re not always that effective and NGOs don’t always have a company’s best interests at heart,’ Gifford explains. ‘But investors are in a win-win situation, particularly those large diversified investors that own a piece of the whole market. If you can address environmental sustainability issues across the market and you own a chunk of it, ultimately you’ll make more money. This is the philosophy of the PRI.’

This heady talk of convergence between companies, investors, society and the environment sounds all too cozy for some environmentalists, who see the PRI as just another corporate ‘green-washing’ exercise, designed to generate positive spin without fostering genuine change.

Gifford accepts that the PRI is ‘aspirational’ rather than prescriptive and that many signatories are still trying to implement the principles. The PRI’s last annual review, which was released in mid-2008, revealed that only 39 percent of fund managers and 25 percent of asset owners have integrated ESG issues into their investment decision-making process ‘to a large extent’.

Paying the piper
The PRI asks signatories to make a voluntary $10,000 contribution to help fund the initiative and Gifford says only about a quarter have paid up so far. That’s not necessarily indicative of a lack of commitment, however, he adds, as many of the signatories are niche fund managers or small SRI consultancies that are not expected to pay.

While investor awareness of ESG issues is on the rise, Gifford believes some companies still need to wake up to the evolving investment climate. He thinks IROs who complain about receiving too many ESG questionnaires are missing the point.

‘All those SRI surveys corporates receive are eliciting information investors are willing to pay for, so there’s a market demand,’ he points out. ‘It’s important that companies report ESG information in a systematic fashion using tools such as the Global Reporting Initiative (GRI). We’d advise any companies that feel overloaded with surveys to just produce a really comprehensive sustainability report and get involved in the GRI process.’

Another frequent complaint from listed companies is that precious management and IR time is wasted in separate meetings with fund managers and corporate governance analysts from the same investment houses. Gifford shares this concern and believes fund managers need to work to improve the consistency of their message.

‘ESG needs to be integrated into the fund manager’s wider understanding of the company,’ he says. ‘It doesn’t matter if everything the corporate governance analysts are asking is valid, as long as the people who buy and sell the stock don’t care about these issues.’