As an increasing number of UK charities seek to invest more responsibly and address environmental, social and governance (ESG) issues through their endowment portfolios, it seems right to ask if they are getting what they want from the asset management industry...
What are the good and bad practices when it comes to the ‘stewardship’ of client assets and how can a charity identify ‘greenwashing’—a term coined by environmentalist Jay Westerveld in 1986 to describe misleading environmental claims?
Asset managers must step up their reporting of ESG issues and clients must hold their asset managers firmly to account.
Careful v careless
A careful and responsible asset manager thinks long-term, considers the broader–and often complex–relations between society and a business, and engages actively with companies to drive positive change. In contrast, ‘careless’ managers often over-simplify to make their lives easier, spending little time and resource actively engaging and rarely considering the broader policy issues that may put their clients’ capital at risk.
Trustees need to beware of ‘greenwashing’ from managers who jump on the ESG bandwagon and make statements that may not stand up to scrutiny.They must also beware of managers that opt to ‘outsource’ ESG work.
Stewardship as a mindset
Considering stewardship as a mindset means thinking like the owners of a business and not the shareholders, because when these companies come to grow, their influence over society spreads. In fact, executives of the world’s largest companies arguably exert more influence than the governments of many countries and can help to shape the investment landscape and promote the sustainability of returns in the future.
Asset managers should address wider environmental and societal issues. No company is perfect and most have exposure to ‘negative externalities’, a term coined by economists to describe costs imposed on others without adequate compensation. This could be, for instance, harmful emissions. Businesses that do this can be accused of exploiting ‘natural capital’ or ‘social capital’ in order to make ‘financial capital’.
Take the consumer company Coca-Cola, where obesity and plastic packaging cause serious concerns. The company clearly recognise these risks and disclose them in their annual ‘10K’ filing with US regulators: “obesity concerns may reduce demand for some of our products” and “changes in laws on beverage packaging could increase costs”. They are aware of these threats and have responded by adjusting product lines with diet variants and announcing a global ambition to “collect and recycle a bottle or can for every one [they] sell by 2030”. The Coca-Cola enterprise embrace the circular economy, where everything gets recycled. The question is whether these companies are acting quickly or resolutely enough and whether their focus should be on reducing, as well as recycling waste, considering that taking this action faster will likely cut profits. However, even in the long term, companies who do not consider harmful externalities could see sales suffer and share prices fall.
Climate change – the greatest challenge
The greatest environmental challenge today is climate change. The major governments of the world agreed on common targets at the UN Paris Summit in December 2015 with a pledge to “keep a global temperature rise well below 2oC and pursue efforts to limit further to 1.50C”. Sadly, adding up the pledges made so far still results in more than a 3oC increase with many predictions suggesting it could be worse. However, the concluded UN COP24 climate talks in Katowice, Poland, which sought to negotiate a global framework to support the Paris agreement, provide some cause for optimism. Despite issues and reluctance from some parties, a new ‘rulebook’ was agreed that will act as an operating manual for all 196 countries when reporting on their progress in coming years and will provide guidance on the relative roles of both developed and less developed nations in mitigating their emissions and participating in the Paris process.
Serious action is needed to radically transform the energy system by reducing net emissions to zero. Policies to tackle climate change need to ratchet-up dramatically and if action is not taken, climate stabilisation will prove impossible and material physical, ecological, societal and economic costs will follow. Accordingly, the ‘Paris’ pledge as an objective may not be met, but the subsequent climate-related impacts will become so material, that a cut to emissions must follow. At such a point, the transition away from a carbon-intense economy is likely to be disorderly from a macro-economic, societal and asset pricing perspective.
It’s time for everyone to take action
Everyone needs to play a part in driving change, including both asset owners and managers. At Sarasin & Partners, climate change is identified as one of our five ‘mega-themes’, which will shape investment markets across the next decade. An increasing number of our charity clients have signed up to our ‘Climate Active’ strategy, which combines engagement and divestment to persuade companies to take faster action where we identify risks. We will divest from any company where we do not believe enough progress is being made. So far, we have written to 35 companies seeking a commitment to the Paris goals and alignment with a pathway towards zero net emissions.
This is not to say that other institutional investors are inactive. We form alliances with like-minded investors to increase the power of our voice wherever we can. For example, we are co-coordinators, alongside the Church Commissioners, of a large group of investor engagements with European oil and gas companies under the Climate Action 100+ initiative, which brings together over 300 investors and $32 trillion of invested assets. We are also leading an investor initiative to challenge companies and their auditors to ensure they are reporting to shareholders in a way that takes account of the Paris Climate Accord. All such efforts should be widely encouraged, while attempts at ‘greenwashing’ need to be robustly challenged.