“Pension fund trustees should seek expert advice on their proposed investment strategy for each pension fund, including expert advice on how best to incorporate ESG considerations into investment analysis and decision-making processes,” the report states.
Grosskopf concedes that finding that “expert advice” won’t be easy, simply because there aren’t a lot of people in the investment community with financial and ESG expertise. “That has to change,” he says. “You have to be hiring people that are able to bring these issues into the investment decision-making process. That’s clearly a skill gap that will need to be breached over the next few years.”
Starting Fresh
The first UN report on fiduciary responsibility—commonly referred to as Freshfields—provided important guidance for pension plans considering ESG implementation. The report also looked at the legal barriers to ESG integration, with some discussion of materiality, Grosskopf explains.
“Can you actually establish a link between ESG issues and value in the investment process? The original Freshfields report was the first time the issue had been looked at in that kind of scale.”
“I think the importance of Freshfields is that it cleared up an issue that seemed quite real in the investment community but the report argued was not an issue at all: the supposed conflict between fiduciary responsibility and responsible investment strategies,” Berger adds. “So it was saying, ‘Let’s clear that obstacle to responsible investment.’”
After Freshfields was released, the assets under management of institutional investors that incorporated ESG issues into their investment process increased dramatically. However, perhaps the most significant development that arose in the wake of Freshfields was the launch of the Principles for Responsible Investment (PRI) in 2006 by former United Nations Secretary General Kofi Annan.
The PRI now has nearly 600 signatories from the institutional investment community, including many of the world’s largest pension funds, representing about 18 trillion U.S. dollars in assets. Canadian signatories include:
• the Canada Pension Plan Investment Board,
• the Caisse de dépôt et placement du Québec,
• the British Columbia Municipal Pension Plan,
• the Public Service Alliance of Canada Pension Fund,
• Ethical Funds,
• Growthworks Capital, and
• Inhance Investment Management.
“The PRI is helping identify best practices among investors,” Fiduciary II states.
Growing Pains
Yet despite the success of the PRI, there have been some challenges. The report notes that very few asset owner signatories to the PRI are adopting one of its main principles: the promotion and acceptance of PRI within the investment industry, including ESG integration, the alignment of investment mandates, monitoring procedures, performance indicators and incentive structures.
“The culture within many consultants and asset managers can be to neglect these issues and to treat them with a “tick box” mentality, rather than an issue of substance which needs to be measured and appraised,” the report states.
Some signatories are not adequately following all of the PRI’s principles, says Osgoode Hall’s Professor Richardson, but it’s difficult to quantify the extent of the problem. “As a voluntary code, without robust compliance and enforcement machinery, some perfunctory implementation of the PRI should not be surprising.”
Grosskopf says he would like to see asset owners who are signed up to PRI, or even those who are not signed up, incorporate ESG issues within their investment mandates as a standard practice. “Certainly, this has been a focus within our process.”
Berger says it’s important to recognize the worldwide scope of the PRI and the advantages that come with that scale.
“It covers all asset classes, there are a huge number of participants and they have a strong internal dialogue, so smaller institutions as well as larger institutions can learn from each other. It’s a strong vibrant community,” he notes. “Secondly, there’s a commitment by PRI signatories to report on their progress and to essentially undergo an audit process. So for critics who worry about greenwashing, the PRI’s insistence on taking these commitments seriously is really quite critical.”
“The PRI unites institutions and people from a variety of countries whereas regulatory responses are usually worked out nation by nation,” Berger points out. “There hasn’t been a great amount of cooperation among international regulators until the recent crisis. The PRI really is a global phenomenon.”
Doug Watt is an Ottawa-based editor and writer specializing in socially responsible and sustainable investing.
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