Monday, December 19, 2011

USA Behind in ESG Investments

The US is falling behind other countries and regions in integrating environmental, social and governance (ESG) factors into mainstream investment decisions, largely due to perceived legal or fiduciary risks, experts said.

“There’s no question in my mind that Northern Europe has got sustainable investing in its sights,” Roger Urwin, global head of investment content for consultancy firm Towers Watson, told attendees of the ESG USA 2011 conference in New York on December 13.

Australia and the UK look to be next to jump on the ESG bandwagon, but there are “big and very ugly roadblocks in the US” to sustainable investing, he said.

The issue of fiduciary duty is a major barrier to the incorporation of ESG factors in investment decision-making in the US, said Jay Youngdahl, trustee for a $650 million benefit fund and a partner at law firm Youngdahl & Citti in Houston, Texas. A fiduciary duty is an obligation to act in the best interest of another party, in this context, the investors in a fund.

“It is holding it back,” he said. “It is a refuge for people who do not want to see ESG put into investments. It does not need to be. This roadblock is an incorrect roadblock legally.”

Any time trustees want to do anything in the ESG space, lawyers tell them this would be a violation of their fiduciary duties, Youngdahl said. “That’s wrong generally speaking,” he said. “On fiduciary duty, there is an extraordinarily high level of intellectually sloppiness that is a major problem for lawyers who work in this area.”

But the Occupy movement in the US has provided a spur to rethink many things, including fiduciary duty as it relates to ESG investing, Youngdahl said. “But it takes courage,” he said. “The American legal establishment at this point does not have that courage.”

In August, investment manager Pimco signed up to the UN-backed Principles for Responsible Investment (UN PRI) and adopted ESG integration into its overall investment process. But more market-leading investment firms need to follow in Pimco’s footsteps and commit to the UN PRI to create momentum in the US and foster widespread adoption, said Michael Burns, Pimco’s executive vice-president.

The firm had extremely strong management support for this initiative, and pressure from and endorsement by clients around the world “definitely accelerated the process”, he said.

“We’ve had a number of Northern European investors help us to understand at an early stage the value of ESG factors in investment decision-making,” Burns said.

During a review, Pimco discovered it was already taking a number of steps that were ESG-related, such as imposing a rigorous standard in evaluating the governance structures of companies. “We were just terrible at communicating it to the broader investment community,” he said.

But there are potential impediments for investment managers considering adopting ESG integration, including the fiduciary duty issue and the need for firms to become comfortable with the legal representations they will make about incorporating ESG, Burns said. For example, when signing on to the UN PRI, a company is making a representation about what it will do and companies need to understand the ramifications and be sure they won't expose themselves to liability.

“I think the legal uncertainty is something that makes some firms step away,” he said.

Another key issue is managers’ lack of information about investors’ true interest in ESG integration, with some investors opposing such initiatives.

“Being able to speak to that audience is equally important as being able to speak to the audience that’s very supportive and I don’t think many investment managers are willing to have those tough conversations,” he said.

Incorporating ESG also requires significant time, resources and training. “It is a costly investment, but it’s one we think will pay off over time,” Burns said.

Source:  Environmental Finance

H/T to Ron Robins MBA at Investing for the Soul. Ron has this to say: "In the US, the degree of scepticism about human induced climate change is much greater than it is in Europe. Just look at what the Republican presidential hopefuls say on this issue! Thus, such attitudes influence American's beliefs of the relevance of ESG issues.

Meanwhile, we all know that companies who lead in responding most effectively to ESG issues are generally 'best of sector,' both financially and in comparative stock performance."

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