The Hindu Business Line : ‘Sustainable’ investing

As larger pension funds begin to include environmental, social and governance factors in their investment framework, sustainable investing may finally be moving mainstream.

Socially responsible investments (SRI) are often hailed as a means to finally effect meaningful change on the environmental landscape. The rationale is that ethical screens on an investment universe should nudge corporates towards sustainable policies and actions as capital is channelled towards those that demonstrate an orientation towards environmental, social and governance (ESG) factors.

Until the last decade, this class of investments was regarded as a niche and often marginal segment. But as larger pension funds begin to include ESG factors in their investment framework, sustainable investing may finally be moving mainstream.

UN initiative

Certainly, the biggest push in this respect has come from the United Nations-backed Principles for Responsible Investment (PRI) initiative. The PRI to date has garnered more than 550 signatories — comprising pension funds and fund managers representing some $13 trillion in assets — who agree to six principles. These include incorporating ESG issues into investment analysis and decision making; and seeking disclosure on ESG issues from companies that they invest in.

In a sign that the group means business, a number were recently dropped from the list for failing to comply with a requirement for an annual implementation update.

Among long-term funds, it appears PRI is gaining traction. A UK survey of the country’s 30 largest pension funds found that 35 per cent seek fund managers who are signatories of the UN PRI, and another 25 per cent use climate change competence as an investment criterion.

Asian scene

But what inroads has SRI made in Asia? A study of Asian pension funds by the Association for Sustainable & Responsible Investment in Asia (Asria) has found that the region’s funds lag in ESG adoption relative to their counterparts in developed markets.

This is not surprising. Trustees will need to be convinced that ethical screens can deliver returns at least comparable to the broad market at comparable or lower risks. But for long-term funds, there may be little alternative but to go the way of responsible investing. This is because sustainability issues will impact companies’ balance-sheets and viability.

As Asria’s report points out, trustees will need to ensure that the companies which their funds invest in act in a manner that protects shareholders’ long-term interests. One example is infrastructure investments, where surely due diligence should include vigilance on environmental impact assessments. Ultimately, pressure will grow from developed markets for wider adoption of sustainable investments.

Already, sustainability investors representing $130 billion of emerging market assets are calling for more ESG disclosure from the region’s companies. For now, the gap lies in the availability of long-term data on the risks and returns of this investment class .

But even with the paucity of such data, the tide may well be unstoppable as more pools of capital begin to regard sustainable criteria as a form of risk management and more companies are forced to be more socially and environmentally responsible.

(By arrangement with Business Times, Singapore.)

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