At home for the holidays in Australia, UN Principles of Responsible Investment executive director James Gifford, a founder of the organisation, told Business Spectator that instead of scaring off investors the crisis had reminded fund managers that sustainable corporations that ticked all the boxes were the most likely to survive large downturns.
"There is a traditional view not just among retail investors but also among professional investors that there might be a trade-off between returns and PRI. But if you look at the corporate sector it’s just not true. Sustainable companies in the world – companies like Siemens and UniLever – are the least corrupt, most sustainable and most productive,” Gifford says.
"For any leading, global, world class company, not only is there no trade-off, sustainability drives profitability.
"During the GFC, PRI signatories grew faster and because people realise that a responsible approach to investment is not a niche sideshow, they’re core to delivering long-term goals.
"It’s getting back to basics, where are the true values, not the shenanignans that were going on pre-crisis.
"Every organisation is part of society, if they are too far out of tune with society’s expectations, society will push back.”
Gifford’s PRI initiative began in 2006 and requires fund managers to implement six key principles related to sustainable environmental, social and governance goals.
Presently, 15 per cent of all funds, stocks and equities under management globally, $30 trillion worth, are signatories to the PRI initiative, including 25 per cent of all equities.
Gifford says the initiative is different to "product-orientated” so-called ethical investing, where organisations rate and make recommendations on a stock or corporation. Rather, PRI is a "whole of organisation commitment” that requires the managers to make these assessments independently and report back to the PRI on how they are going about it.
"It’s not a strategy, it’s an investment belief with a whole lot of different approaches,” he says.
"It’s an additional lens to look at quality of management; and companies that mange environmental, corporate and social issues better are better fund managers over all.”
With a sizeable chunk of the world’s funds under management signed onto the initiative, Gifford says the approach is no longer "niche” but driving the market ideology.
"PRI probably represents the market when it comes to returns, rather than being a niche of the market,” he says. "Five or eight years ago it was a niche funds focus, compared to mainstream funds. But the last three years, it has shifted towards being more conventional, looking at the ESG factors within mainstream investment.
"There’s no doubt that ESG factors have been material. Doesn’t mean they always are, and it doesn’t’ mean they all are. But certainly ESG issues have been material for certain times and certain times of the cycles. Had you been smart you could have outperformed.”
Gifford cites academic research by London Business School’s Elroy Dimson and Harvard Business School’s Bob Eccles, among others, which has concluded that high sustainability companies outperform in the long term.
He said that Dimson found over a 10-year period that S&C Asset Management in the UK, which engaged with shareholders over corporate governance and was strong on climate change issues, enjoyed a subsequent 4 per cent outperformance on its peers.
"A number of studies show comps with better ESG performers have less company risk, good relations with employees, customers, tend to be more resilient in their markets. When things go pear-shaped they are better placed to weather the storm.
"People are increasingly realising many of the issues driving future financial performance are the in-tangibles. They’re not getting caught up in consensus forecasts, etc.”
Australia has been among the best countries for take-up of the principles – with major managers like Colonial First State, AMP and industry super funds leading the way. Europe has also recorded high rates of signatories. The US has been slower in signing, with some pension funds yet to join, however market leaders like Blackrock, Goldman Sachs Asset Management and State Street are signatories. In Brazil, when Previ pension fund signed on much of the market followed and now 60 per cent of funds under management there are signatories. The figure is much lower in China but Gifford is confident that once it catches the numbers will quickly increase there, and in the US.
"The pension fund signatories in the US are not as strong, but the biggest and most respected are active signatories. But there’s still a long way to go.
"China is very good on clean tech venture capital on the private equity side. But in in terms of mainstream responsible investment, it’s still very early stage. But it’s just a matter of getting out there. And also an issue of leadership; one or two large funds can make a big difference. It just hasn’t happened there yet.”
Gifford said beyond returns, another driver of take-up is social media, which is forcing companies to become more accountable.
"Companies are being held to account due to social media more than they ever hard. Radical transparency is happening in global supply chains. If there is scandal in one, human rights violation, people along the ownership and financial chain can be held to account.
"And ESG criteria give insurance-like protection in a legitimacy crisis – social capital. If there is a scandal, they have a lot of social capital to draw on. Like Nestle and their problems with palm oil. Ultimately, they’ve had their issues, but it’s a good company, with good sustainability and community relations.”
He says one of the key roles governments have in promoting responsible investing is to aid transparency, so fund managers can have the data to make the best possible decision.
"We need to encourage governments to look at a global agreement on corporate sustainability reporting. At least we get a baseline set of data for companies across the world so investors know whether they’re facing risk or not.”
Finally, for retail investors, Gifford suggests looking out for responsible investing approaches in fund managers, and being careful to distinguish them from ethical investment options, which may be one-off but not represent the organisation’s overall approach.
"Look at the approach of the organisation as a whole," he says. "Ask, are they taking these issues seriously as a core part of investment process? Look deeply and ask those questions.”