#ICGN16: Part 3 – Integrating ESG

#ICGN16, the annual meeting of the International Corporate Governance Network, was held in San Francisco, June 27-29. #ICGN16 was the hashtag for tweeting at the meeting, so check Twitter for additional posts to #ICGN16. This post is a continuation of a few rough notes from the conference. Read Part 1 and Part 2 of #ICGN16.

#ICGN16: Integrating ESG in Strategic Investment Decision-making 

Michael Jantzi, CEO, Sustainalytics moderated the panel.

Michael Jantzi

#ICGN16: ESG – Michael Jantzi

A growing number of institutional investors recognize that good governance and prudent management of an investment portfolio requires the consideration of a range of environmental, social and governance (ESG) factors. This panel shared perspectives from some of North America’s most experienced investors already developing and implementing ESG integration strategies into their investment processes.

PWC just released report. Chief finding is that companies are more willing to engage — directors too. Highlights include: 

  • 97% of limited partners (LPs) believe responsible investment will increase in importance over the next two years
  • 83% believe that better management of ESG factors will either improve returns or reduce risk, meaning that ESG management is part of their fiduciary duty
  • 19% of LPs currently attempt to quantify the impact of their GPs’ responsible investment efforts
  • 18% of LPs have withdrawn from an investment or withheld capital on ESG grounds
Aaron Bertinetti

Aaron Bertinetti

A few points from the panel discussion follows:

Aaron Bertinetti, Vice President, Research & Engagement, Glass Lewis – Australia/Asia – ESG mostly integrated into investing. They have tools for voting, policy development, reporting, as well as for engagement. The US is playing catch up on integration. It is being pushed by beneficial owners. There has lately been increased demand for engagements from companies around pay. In 20% of engagements, the company will have independent directors involved.

Once notice of the annual meeting is out, Glass Lewis doesn’t want to discuss but will take inquiry re accuracy of reports. Meeting through the GL Meetyl platform. They want companies not going to go through presentation deck. They want a conversation, not companies (or investors) talking at them. Has anyone tried meeting through the Meetyl platform? I’d be interested in learning of your experience.

Brian Rice

Brian Rice

Brian Rice, Portfolio Manager, CalSTRS – CalSTRS views ESG though the lens of risk and investment opportunities. The fund recently developed a standardized methodology for obtaining assurance from external fund managers that each was aware of the CalSTRS 21 Risk Factors and had considered these environmental, social and governance risks when making investment decisions on behalf of the fund.

CalSTRS is focused on a sustainable approach, especially around climate change. They actively monitor portfolio managers. Approach is shifting from focusing on ESG risks towards seeing more of the opportunity side.

They began primarily with emerging markets. 55% of CalSTRS investments are in public equities in 7000 companies. Historically climate change risk was the primary focus. Recently, focus has shifted to opportunity side and energy efficiency. For example, they are looking at methane emissions from natural gas. Of course, leaks plugged increase efficiency. Mining, diversity, LGBT rights, majority vote standards are among many areas mentioned.

CalSTRS is in dialoge with chief sustainability officers, IRs, attorneys, etc. The attempt to codify risks pushes them out as issues, starts conversations, and facilitates surveys of PMs. CalSTRS tries incentivizing investment managers for the longterm… looking out three years, instead of one.

TerriJo Saarela

TerriJo Saarela

TerriJo Saarela, Corporate Governance Director, State of Wisconsin Investment Board – SWIB manages most of their investments internally. They are engaging with PMs and are engaging with companies as a fund. Engagements in Japan are yielding positive changes. Companies are visiting them, from as far away as Japan. 20% of their meetings with companies include independent directors.

Saarela finds independent directors are not so scripted. Resources are always an issue, since SWIB staffing is small. It is helpful finding out how others do it and working with other funds.

Paul Schneider

Paul Schneider

Paul Schneider, Head of Corporate Governance, Public Equities, Ontario Teachers’ Pension Plan, Canada – He recently had meetings in Calgary with PMs and companies around issues of ESG, especially around oil sands issues. Companies are generally more conscientious than you might think. There was a big fear among PMs that some companies are going to be blacklisted. However, in most cases OTPP is not prescriptive. The focus is more focus on process.

Publisher’s Note: I’d like to take this opportunity to thank CalSTRS and OTTP for sharing most of their proxy votes in advance of meetings. These disclosures are going to play an increased role over time as other funds, such as Norges, do likewise. Vote disclosures not only help retail investors decide how to vote, they get the attention of small institutional investors as well. Few funds have the resources of CalSTRS and OTTP. Seeing how larger funds vote helps smaller funds set voting policies and more closely align their votes with funds that do have better research capabilities. I hope SWIB, and others will follow. See how CalSTRS and OTPP are voting current proxies:

  • CalSTRS (California State Teacher Retirement System)
  • OTPP (Ontario Teachers Pension Plan)

Find out more about funds announcing their votes in advance of annual meetings at Shareowner Action Handbook.

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