Exploring Next Stage of ESG Integration in Stockholm

Last Monday 8 June in Stockholm, Sweden at the IMN 8th European Summit on Corporate Governance and Responsible Investment I was invited to opine on the future of ESG integration into investment policy.  The conference keynote was from Richard Gröttheim, Executive Vice President of AP7, one of seven pension fund investor groupings created by the Swedish government in 2000 to professionalize and diversify the Swedish pensions system. I was intrigued by Mr Gröttheim's description of the pure alpha strategy, a kind of “hands-off” multi-strategy approach to seeking returns, and preventing the outsourced money manager from “hiding” returns tied to beta or market-linked risk/return profiles. After a succinct and insightful presentation of the AP7 approach to investment that included how “ethical and SRI” factors are considered and the corporate governance policy, I was able to ask him how the AP7 approach helps them handle the ongoing Chevron Corporation (NYSE:CVX) Texaco saga in Ecuador, where the national environmental legislation was not rigorous enough, the government itself is implicated, and the litigation looks to span both Ecuadorian and US court systems. See The Economist article “Justice or extortion?”, May 23rd , comments and letters. In brief, his response pointed to the limits of the policy, and the importance of having the 2 outsourced ESG research providers, Ethix and GES-Investment Services, to provide engagement approaches.

The panel "The Next Stage Of ESG Development: Integrating The Movement Into Mainstream Investment Policy" was a short 45 minute flip through the ideas and experiences of four panelists, guided by Anders Thorendahl, CIO of the Church of Sweden. ESG is the abbreviation for environmental, social and governance. The Church of Sweden is an iconic Scandinavian institution with a long history of using socially responsible criteria in its investment philosophy and executing its mandate. The Christian ethics influence the investment approach as covered by IPE in Q3 2009, A Christian Institutional Investor, along with a quaint water colour (I wonder if Anders saw it?!). The four-person panel included 2 research shops based in Europe, Sustainalytics of Amsterdam, The Netherlands and Asset4 of Zug, Switzerland, and consultant OnValues in Zurich Switzerland. Sinclair & Company was there to offer the US and Emerging Markets exposure. Cheryl Johnson Watts SVP at IMN produced a solid event, as she did last year in Copenhagen, another beautiful Scandinavian port city.

Anders kicked off by exploring the regulatory future, in the reality of 2009 and the swing to greater government and regulator roles. Anders probed for our thoughts on the proposition that the future for ESG in investment is simply a matter of a case by case instilling of ESG accountability while others believe government intervention and regulation may be necessary to further the cause. What should the next stage of ESG development entail? The panel covered some thoughts on how more investors are asking questions about how to integrate ESG, looking at ESG in the context of strategic asset allocation, and my own experience of integrating ESG into investment strategies as a sustainability meta-theme. Henrik Steffensen of Asset4 explored the risk of not looking at ESG using data over time using a sample of financial institutions pre- and post-2008 meltdown: turns out only 2/5 institutions are still listed public entities in 2009. In the post-2008 meltdown asset management landscape, institutional investors are seeking new answers. Regulations provide the catalysts. Scandinavian countries have increased reporting requirements for companies and the various investment entities are scrutinized for adherence to international treaties to which countries have subscribed; although the response to the UK (since July 2000) and South African (2008) regulations for pensions reporting has been weak. South Africa is again exploring the prospect of prescribed assets whereby pension funds and money managers may have to invest in securities tagged as “socially responsible”.

Ivo and Dierderik agreed that we have many questions we seek to answer in 2009, some as practitioners, others as a financial discipline. While many institutional investors want greater of accountability on the part of management of failing corporations and asset managers that are entrenched in scandal: many institutional investors wonder if the current movement towards responsible investment is capable of thorough integration into mainstream investment policy. There certainly are cultural differences in the way different countries or regions try to integrate ESG, from Nordic countries vs. Western Europe, or the US, or emerging markets. Of course our comments were abbreviated in the short space of time, but nevertheless the panel covered a quick overview of future thinking. Feedback from conference delegates to my two provocative comments was positive: we are all emerging markets now, and there is a bubble in microfinance and soon one of the microfinance funds will blow up. Look out for the first major BRIC (Brazil, Russia, India, CHina) summit this week in Russia.