Fiona Reynolds : « The idea that sustainability equated to diminished returns has been steadily eroded with numerous studies »

Fiona Reynolds, Managing Director of the PRI (United Nations) gives us her point of view on SRI in the investment world. According to the idea that sustainability equated to diminished returns has been steadily eroded with numerous studies...

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Could you give us an overview of the SRI and ESG practices in France and in Europe ?

Europe has really led the way in responsible investment practices. Countries in Scandinavia, for example, have been looking at ESG issues for a number of years, before most of us started talking about these factors. A recent survey by Schroders found that institutional investors in Europe are significantly more advanced in terms of their adoption of ESG investment practices, compared with their counterparts in the United States. In Europe, 58% of pension fund investors already see ESG as an important consideration, substantially higher than 21% in the US. Furthermore, just 14% of pension fund investors in Europe do not think ESG will ever be an important consideration, yet this rises to 53% for investors in the US.

Why is the extra-financial research gaining in importance for portfolio managers and how ?

Responsible investment is an approach to investment that explicitly acknowledges the relevance to the investor of ESG factors, and the long-term health and stability of the market as a whole. ESG criteria are increasingly recognized as material to long-term financial outcomes. Looking at ESG is particularly important for evaluating portfolio risks, as well as to identify new opportunities. Other considerations are also compelling companies to address ESG issues more explicitly. Climate change, increased attention around child labour and governance issues such as tax avoidance is prompting both investors and corporates to focus more on ESG criteria.

What about the regulation on SRI with the Energy Transition for Green Growth Act and the article 173 ?

In France, the main innovation in the legal regulatory framework is the Article 173 of the France’s Energy Transition law of August 2015. Asset owners and asset managers are now required to disclose information on their management of climate-related risks, and, more broadly, on the integration of ESG parameters in their investment policies. This regulation is clearly a step forward, and France is the first country to introduce such disclosure requirements. The PRI believes that policymakers have a critical role to play moving responsible investment forward so we welcomed this move by the French government.

What is happening today regarding portfolio decarbonization ? Do you have any example that you can give us ?

Investors are increasingly concerned about high carbon exposure in their portfolios. A growing number of pension funds across the world have decided to fully or partially divest from companies that generate revenues from oil, gas and coal. Last year, Norway’s sovereign wealth fund, the world’s biggest, excluded 52 coal-related companies in line with new ethical guidelines barring it from investing in such groups.

While some PRI signatories have divested out of fossil fuel assets, others have decided to engage companies instead, believing that you can’t influence behaviour unless you have a seat at the table. By engaging with companies, investors can encourage them to shift capital to clean technologies like renewables and green financial instruments such as green bonds. We’re very supportive of decarbonisation and in the lead-up to the Paris agreement, the PRI launched the Montreal Carbon Pledge in 2014. That is about investors measuring the carbon footprint of their portfolios to actually understand what their exposure to carbon is. We had 120 investors who signed onto that, representing $10trn worth of carbon footprinting, which is fantastic. You can’t decide what to do about something if you haven’t measured it and know where you stand.

What measures should be taken to accelerate the development of SRI in investor’s portfolio ?

We still hear a lot of arguments from investors that looking at ESG factors has a negative impact on returns. But market research proves them wrong. Over the last decade, the idea that sustainability equated to diminished returns has been steadily eroded with numerous studies, including ones from Arabesque Asset Management, Harvard, MSCI and others showing that looking at ESG over the long-term equates to outperformance of market benchmarks. Part of this development is the realisation that investors across all asset classes have seen the benefits of using ESG in order to manage the emerging definitions of risk, thereby laying the groundwork for more robust returns. But clearly, more education is needed. We also need more investors to keep putting pressure on policymakers and regulators to move sustainable investing strategies forward.

RF October 2017

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