Wednesday, March 13, 2013

Factors Driving the Growth of Responsible Investing

A number of factors are coalescing to drive responsible investing. They include new investment standards, government regulation, and scientific observations. Unprecedented environmental and social pressures driven by food, water and energy security, access to natural resources, climate change, human rights, supply chain, labor standards and ageing populations have become material issues for businesses.

Many states have adopted binding Renewable Portfolio Standards (RPS). This legislation mandates renewable energy targets for utilities and in some states the RPS will be as high as 40 percent.

As explained by PRI, there is "a growing recognition in the financial community that effective research, analysis and evaluation of ESG issues is a fundamental part of assessing the value and performance of an investment over the medium and longer term, and that this analysis should inform asset allocation, stock selection."

"Mounting evidence of the financial materiality of ESG [environmental, social and governance] issues, alongside growing demands from regulators, clients and beneficiaries for more sustainable approaches to investment, are among the key drivers behind the adoption of responsible investment practices worldwide. Increasingly, investors concerned about the impact of short-termism within investment research, asset allocation, and performance monitoring recognise that integrating ESG issues into both investment analysis and stewardship practices forms part of their fiduciary duty to clients and beneficiaries and want to see their portfolios managed in a way that systematically assesses drivers of risk and return over longer timeframes."

The increase is green investments reflects growing interest in ESG issues. These issues are becoming part of investor assessments which are helping managers to select and manage their portfolios. Shareholders pressure and risk mitigation are driving ESG efforts.

According to research by the US SIF Foundation's 2012 Report on Sustainable and Responsible Investing Trends in the United States, there is growing investor interest in considering environmental, community and other societal or corporate governance issues. According to the Foundation, many investors are beginning to develop their own in-house capabilities to analyze ESG criteria. These developments speak to the potential for further growth in the US SRI market.

Investors are now forcing corporations to address issues like transparency, corruption, board structure, shareholder rights, business ethics, risk management and executive compensation.

As reported in the Huffington Post, at the end of 2012 a coalition of the world's largest investors called on governments to "ramp up action on climate change and boost clean-energy investment or risk trillions of dollars in investments and disruption to economies."

In an open letter, the alliance of institutional investors, responsible for managing $22.5 trillion in assets, said rapidly growing greenhouse gas emissions and more extreme weather were increasing investment risks globally. The group called for dialogue between investors and governments to overhaul climate and energy policies.

A number of reports are also demanding that governments get more involved in efforts to manage climate change. One of these reports comes from the World Bank which said that current climate policies will translate to a world which will warm by up to 4 degrees Celsius by 2100. (Scientist say the upper limit is 2 degrees Celsius).

A 2012 Deloitte survey of 208 global CFOs from 10 countries found that more than 75 percent of CFOs surveyed said communicating sustainability issues to shareholders and institutional investors is important.Additionally, the report indicated that 93 percent of UN Global Compact member CEOs view sustainability as a critical driver of their company’s future success, and up to 81 percent said sustainability is an important factor in strategy and operations.

The Deloitte study also showed that a company that improves its ESG performance form a very low will be rewarded more than another one already performing at a higher level of energy efficiency.

A report published earlier this month by The Conference Board says shareholders are placing more value on corporate sustainability initiatives, and are becoming increasingly interested in linking such performance to executives’ compensation. Intel, Xcel Energy, Alcoa, ING, National Grid, Shell, and Suncor Energy are among the US companies tying executive compensation to sustainability performance, it said.

According to a study conducted by Siemens and McGraw-Hill Construction titled "Greening of Corporate America," energy and cost savings remain the most important drivers encouraging sustainability in corporate America,

large businesses are now demanding that federal and provincial policymakers join them in the sustainability/CSR challenge.

As reported in Environmental Leader investors continue to work for greater transparency on environmental and social issues. Thus far in 2013, investors have filed 365 shareholder resolutions on environmental and social issues, with 38 percent of the proposals focusing on climate change, energy and corporate sustainability strategies,

These findings were reported by the shareholder advocacy group As You Sow in the Proxy Preview 2013 report. Upcoming votes cover a wide range of topics including climate change, industrial agriculture, environmental management, disclosure, energy efficiency, target setting and shale gas.

A February ruling by the US Securities and Exchange Commission is also noteworthy as it will force JPMorgan Chase and PNC Financial Group to keep a resolution on their proxy ballot that asks the institutions to report on how they consider greenhouse gas emissions in their lending portfolios. The resolution also asks the companies to report on their exposure to climate change risk.

Recently, RobecoSAM and S&P Dow Jones Indices have together launched the Dow Jones Sustainability Emerging Markets Index. The index offers investors a tool for measuring the performance of companies that RobecoSAM has recognized as leaders compared to their peers in terms of corporate sustainability and also aims to provide an effective engagement platform to encourage companies from emerging markets to adopt sustainable best practices.

Cone Communications research published in Environmental Leader found 84 percent of Americans hold companies accountable for producing and communicating the results of CSR commitments. A total of 40 percent of Americans go as far as to say that they will not purchase a company’s products or services if CSR results are not communicated.

Investors, government agencies, market indexes and average Americans are encouraging more environmentally and socially oriented actions from publicly traded companies and these changes are driving green investments and buoying green's bottom line.

© 2013, Richard Matthews. All rights reserved.

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