The UNPRI conference in Montreal last week demonstrated that while progress is being made, there is still a long way to go before sustainability will be fully embraced by mainstream investors. Among the key challenges identified during the conference were:
Incentives— PRI’s Managing Director Fiona Reynolds said that only 6% of asset owners committed to the UNPRI report that their performance management and compensation systems for senior executives include metrics that recognize and reward sustainability. As she noted, “What gets measured gets managed. If responsible investment is to become truly mainstream, it must start at the very top of every organization, with the right incentives.”
Credible data— Keynote speaker Spencer Glendon from Wellington Management noted from a mainstream investor perspective that while there is general agreement that climate change is a risk, there is a “paucity of truth but a wealth of information” around the subject, making it difficult for investors to accurately assess the risk it represents. His perspective was echoed in both corridor and panel conversations, proving that many mainstream investors remain deeply skeptical about the current data around sustainability issues like climate change. As one attendee pointed out, when only 40% of Americans believe climate change is a serious threat, it is hard to make it a priority issue with investors.
Relevant metrics material to performance— A study by German investment management firm Veritas, working with Sustainalytics data, found that out of 148 environmental, social and governance (ESG) indicators only 10 had any statistical relevance to financial performance and only when combined in a multifactor analytical framework. Professor George Serafeim from the Harvard Business School confirmed these findings, noting that Harvard’s research showed that only 13% of 120 ESG indicators they reviewed had a measurable impact on financial performance. Furthermore, he noted these factors only have relevance when analyzed in the context of the ESG issues that are specifically material to the industry the company operates in. In this context, he made a strong case for initiatives like SASB, which is creating industry-level materiality standards for investors to use in evaluating and understanding which ESG issues they should focus on for investment purposes. He also talked about the value of integrated reporting (IR), which reports a company’s organizational and financial performance in the context of its environmental and social impacts. Analyzing data on more than 1,000 firms between 2002 and 2010, his research demonstrates that firms that practice IR can have greater control over their investor base and attract more long-term investors.
Overcoming the academic-practitioner divide— This year, the UNPRI academic conference was held in conjunction with the UNPRI in-person conference in an effort to bridge the academic-practitioner divide. As the academic conference chair noted, the current model of knowledge transfer between academics and practitioners simply doesn’t work, as the challenges noted above attest to. On a positive note, the UNPRI has started taking the best of recent research and producing short summaries readable by a lay audience. It will be interesting to track practitioner uptake and use of this offering.
Despite the hurdles listed above, it is clear there is growing momentum to integrate sustainability in mainstream capital markets. The increasing number of signatories to the UNPRI and the participation in UNPRI gatherings is just one indicator of this. The challenge now is to co-create with representatives from mainstream capital markets a more effective set of tools and metrics that will allow these markets to integrate sustainability as an integrated part of their investment strategies and valuation models. At the High Meadows Institute, we are working with mainstream investment managers, private equity firms and others to help chart this path.