Investment Policy Statements and Sustainability

The investment policy statement is a critical document that establishes how an investment firm, or pension fund, or organization goes about making decisions on if and how to invest capital. The rules of investment allow a degree of discretion for firms building investment products or pension fund trustees choosing between investment sfor their pension fund members. The IPS creates some rules of the game that covers the decision-makers, and offers guidance as decision-makers come and go or investment managers execute investment mandates. It is a framework. It has some legal standing and will be the basis for any checking back to see if things happen probably. Which means it is a critical place to look for where and how environmental, social and corporate governance factors are integrated, so-called ESG factors that cover environmental and social sustainability into the investment approach. If one is seeking to grow sustainable finance, then more and more IPS need to explicitly speak to the issues of sustainability. See worked examples of IPS from Investopaedia and Morningstar.com, for example:

This statement provides the general investment goals and objectives of a client and describes the strategies that the manager should employ to meet these objectives. Specific information on matters such as asset allocation, risk tolerance, and liquidity requirements would also be included in an IPS.

This being the 21st century, never be surprised when social media checks facts against internet-available counter-facts and/or draws negative inferences - see influential blog Daily Kos roughing up Generation Investment Management co-founder Al Gore on Sunday . Some basics of creating the guidelines for socially responsible investment (SRI) include deciding if there are any companies that the investment firm will or will not invest in. Consilium cover some basics of making these decisions, A Social, Moral or Environmentally Responsible Agenda. But remember that asset management is a business. So no surprise for example that sustainability money manager, Australian Ethical this week announced the close of its  fund,  World Trust, Australian Ethical Closes World Trust. With just AusD 6m it was just not large enough to run efficiently. Importantly for our discussion, the firm covers its investment approach with an Ethical Charter which must be read together with its Investment Approach.  At the other end of the spectrum, in the UK a respected sustainability manager has just launched a new fund . In media coverage, Co-op explained:

Zack Hocking, the head of investments at Co-operative Investments, says: "The world is changing and it is throwing up highly attractive opportunities for long-term investors. The need to tackle ageing populations, climate change and global power shortage will see significant investment in those areas in coming years." The new Sustainable Diversified Trust fund will be an actively managed multi-asset fund that aims to offer long-term capital growth. It will hold a mix of equities, bonds, cash and property, but will not invest in firms involved in armaments, tobacco, mining or animal testing for cosmetic purposes.

The Co-operative Investments new unit trust that will target opportunities emerging from a changing world and a shift in attitudes towards sustainable business practices. As always with marketing and sales, the marketing pitch at Co-op suggests "smart investors who want to grow their money while reducing risk". Probably more interesting to readers of JustMeans is the Sustainable Leaders Trust which invests in "about 50 small, medium and large companies, mainly based in the UK, that contribute to the environment, human welfare and sustainability". Which brings us back to the policies of investment majors like the IFC (Investment Finance Corporation), a member of the World Bank group. The IFC's policy on Social and Environmental Sustainability defines "IFC's responsibility for supporting project performance in partnership with clients". The IFC policy guidelines are useful because they have been developed over some years, and tested against challenging situations in emerging and frontier markets. The IFC Sustainability Policy General EHS Guidelines contain information on cross-cutting environmental, health, and safety issues potentially applicable to all industry sectors, "(i)t is designed and should be used together with the relevant industry sector guideline(s)". Similar but different to other sustainability funds, the IFC has its own exclusions policy, which covers what it will not invest in.

1.    The IFC Exclusion List defines the types of projects that IFC does not finance.
2.    IFC does not finance the following projects:

a.    Production or trade in any product or activity deemed illegal under host country laws or regulations or international conventions and agreements, or subject to international bans, such as pharmaceuticals, pesticides/herbicides, ozone depleting substances, PCB's, wildlife or products regulated under CITES.
b.    Production or trade in weapons and munitions.1
c.    Production or trade in alcoholic beverages (excluding beer and wine).1
d.    Production or trade in tobacco.1
e.    Gambling, casinos and equivalent enterprises.1
f.    Production or trade in radioactive materials. This does not apply to the purchase of medical equipment, quality control (measurement) equipment and any equipment where IFC considers the radioactive source to be trivial and/or adequately shielded.
g.    Production or trade in unbonded asbestos fibers. This does not apply to purchase and use of bonded asbestos cement sheeting where the asbestos content is less than 20%.
h.    Drift net fishing in the marine environment using nets in excess of 2.5 km. in length.

  1. i.    A reasonableness test will be applied when the activities of the project company would have a significant development impact but circumstances of the country require adjustment to the Exclusion List.
  2. All financial intermediaries (FIs), except those engaged in activities specified below*, must apply the following exclusions, in addition to IFC's Exclusion List:

i.    Production or activities involving harmful or exploitative forms of forced labor2/harmful child labor.3
j.    Commercial logging operations for use in primary tropical moist forest.
k.    Production or trade in wood or other forestry products other than from sustainably managed forests.
l.    When investing in microfinance activities, FIs will apply the following items in addition to the IFC Exclusion List:
m.    Production or activities involving harmful or exploitative forms of forced labor2/harmful child labor.3
n.    Production, trade, storage, or transport of significant volumes of hazardous chemicals, or commercial scale usage of hazardous chemicals. Hazardous chemicals include gasoline, kerosene, and other petroleum products.
o.    Production or activities that impinge on the lands owned, or claimed under adjudication, by Indigenous Peoples, without full documented consent of such peoples.
p.    Trade finance projects, given the nature of the transactions, FIs will apply the following items in addition to the IFC Exclusion List:
q.    Production or activities involving harmful or exploitative forms of forced labor2/harmful child labor.3

Our best advice is to start small, then establish the right IPS for one's own objectives. Clealy the IFC were smart enough to realise I could only work with them if they did not discriminate aginst wine estates . Yes, we did enjoy lunch at Bread & Wine in the Franschhoek Valley on Saturday at the Moreson Estate. As we see from the IFC examples there is a wide range of criteria, and existing thinking on stakeholder input, that the modern IPS may consider in integrating ESG factors. In emerging markets the IFC has surveyed for response to the 2008 Financial Meltdown. Sustainable finance is not always easy. But it is good work; and the IPS helps keeps things straight.