The investment industry is happy to sign up to sustainability standards on clients’ behalf, but has proved reluctant to make even simple commitments on companies’ own behaviour, writes IC Select’s Peter Dorward.
Since October, new regulations have meant that trustees must state their approach to financially material considerations, including climate change, in their statements of investment principles.
This led to a business boost for advisers as they helped trustees update their SIP. That the end result has, according to the Society of Pension Professionals, generally not resulted in a material improvement in action by pension funds on sustainability issues, is not solely down to the trustees’ motivation, but more importantly the insipid approach adopted by many consultancy companies.
It would appear that the advisory firms and fiduciary managers are quite happy to commit themselves to a standard that involves the approach to their clients’ investments, but are far less committed to any standard that would actually impact on their own behaviour
Typically, the advice provided by consultants on environmental, social and governance issues to help trustees update their SIP has included different approaches to adopting ESG within a portfolio.
One of these approaches is to exclude companies with poor ESG characteristics. These characteristics include not only organisations involved with controversial weapons, tobacco and thermal coal, but also violators of the UN Global Compact.
The UNGC starts with a company’s value system and includes a principles-based approach to doing business. The 10 principles of the UNGC are spread across four areas – human rights, labour, environment and anti-corruption. Signatories to the UNGC are then required to provide an annual ‘communication on progress’ report for all key stakeholders.
Consultants slow to sign up to UNGC
Virtually all investment consultant and fiduciary management companies are now signatories to the UN Principles of Responsible Investment. While the UNPRI deals with a company’s behaviour with regard to their clients’ investments, the UNGC looks at their own behaviour.
By becoming signatories to the UNPRI, companies have committed to incorporating ESG into their investment analysis and incorporating ESG issues into their policies and practices when advising their clients or investing their clients’ money.
UNGC – the 10 principles
Human rights
Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights; and
Principle 2: make sure they are not complicit in human rights abuses.
Labour
Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining;
Principle 4: the elimination of all forms of forced and compulsory labour;
Principle 5: the effective abolition of child labour; and
Principle 6: the elimination of discrimination in respect of employment and occupation.
Environment
Principle 7: Businesses should support a precautionary approach to environmental challenges;
Principle 8: undertake initiatives to promote greater environmental responsibility; and
Principle 9: encourage the development and diffusion of environmentally friendly technologies.
Anti-corruption
Principle 10: Businesses should work against corruption in all its forms, including extortion and bribery.
The UNGC is not an onerous commitment for any company that believes in ESG. Despite this, not one investment consultancy and only two fiduciary managers are signatories to the UNGC.
This failure to sign up to the UNGC cannot be explained by the UNGC being a more recent standard than the UNPRI. In fact, the standard pre-dates the UNPRI by six years, having been launched in 2000.
It would appear that advisory companies and fiduciary managers are quite happy to commit themselves to a standard that involves the approach to their clients’ investments, but are far less committed to any standard that would actually impact on their own behaviour.
Change on the horizon
This is slowly beginning to change. We are aware, somewhat belatedly, that some investment consultants and fiduciary managers are beginning to put their own house in order and are in the process of adopting the UNGC standard.
However, many companies have still not recognised their own responsibility in addressing issues of sustainability. This laissez-faire attitude to their own behaviour must inevitably be reflected in their commitment to the advice they provide to their clients. When someone truly believes in the advice they are giving, it is far more likely to be implemented robustly by the recipient.
Trustee boards can encourage their adviser or fiduciary manager to have a more robust ESG approach to their behaviour by looking at all their suppliers to ensure they have a robust approach to ESG. A first step should involve asking whether they are signatories to the UNGC and, if not, making this a material consideration in any review.
Peter Dorward is managing director at IC Select
