Speaking at the World Economic Forum’s “Summer Davos” in Tianjin in September, premier Wen Jiabao reaffirmed China’s commitment to balancing growth with sustainability. The country, he pledged, “will continue to conserve resources and protect the environment and raise the efficiency of resource utilisation and the capacity to tackle climate change.”
The message is great, but there remains a real question mark over the country’s ability to deliver on this promise, even as it starts to promote socially responsible investment. Recent efforts to get fund managers to engage with the sustainability agenda are pleasing, but it is worth asking whether the country is about to apply weak market solutions to its severe environmental challenges.
It is, of course, welcome news that China is launching an environmental, social and governance (ESG) investment index. The CSI ECPI China ESG 40 Equity Index, made up of 40 domestic companies, is a joint venture between the China Securities Index Company, backed by the Shanghai and Shenzhen stock exchanges, and ECPI, a European ESG research company.
To declare an interest, I have been on the advisory boards of half a dozen socially responsible investment (SRI) funds since 1990, from small pioneers through to larger financial institutions like Norway’s Storebrand. So I believe that SRI is a worthwhile experiment, particularly if the approach moves beyond the screening of company sectors and performance to actively engaging the management of mainstream companies. But it’s truly worrying when you hear senior people from major global companies like Rio Tinto or Unilever expressing concern about the lack of mainstream investor interest in what they are doing in such areas as the ESG agenda and wider sustainability.
At a recent conference on biodiversity for business, Unilever’s senior vice president of sustainability, Gavin Neath, reported that “Mainstream investors have [shown] very little interest and give us very little credit for what we do – and there’s little sign that is going to change any time soon.” He noted that only SRI analysts are interested in Unilever’s investments in such areas as drip irrigation in Brazil, solar-powered ice cream freezers and water-conservation projects.
Rio Tinto chief executive Tom Albanese agreed with this assessment, noting that his company organises regular corporate social responsibility briefings for shareholders – but is finding that mainstream investors, as the Financial Times puts it, “are not interested in Rio’s [ESG] initiatives because they do not think they are core to the business.”
Both executives think the analysts are wrong. And the huge financial liabilities incurred by BP in the wake of the devastating oil spill in the Gulf of Mexico may fuel greater interest in ESG factors. But it is significant that the market-leading Dow Jones Sustainability Indexes only delisted BP after the spill. (To declare another interest, I was on their advisory board for many years, too.) Their latest rankings of companies is also notable for the fact that car manufacturer Toyota – long a darling of the SRI and ESG investment communities – has been dropped because of the quality problems experienced as its rapid growth outran its quality controls.
If such companies are dropped only after the event, critics wonder, are they really providing their investors with value added? Are they any better than their mainstream competitors at detecting emerging risks, most of which have also been taken by surprise by such corporate reverses? I believe that the answer to both questions is yes, but it is clear that SRI funds do have a case to answer.
SRI pioneers remain convinced that major, long-term investors like the pension funds will have to take ESG factors into account. We have already seen major reinsurance companies like Swiss Re begin to integrate such considerations into their own massive shareholdings. But at a time when most financial analysts are still rewarded on a quarterly basis, the chances of opening out investor horizons are small.
Another big SRI ambition is to persuade the huge sovereign wealth funds operated by countries like China, Norway, Russia, Singapore and Saudi Arabia to build ESG metrics and performance targets into their investment activities. Russia seems a long shot, but over time other countries may move within range.
Norway is the poster child in this area, with its Government Pension Fund – valued at US$449 billion (3 trillion yuan) at the end of June – applying active and long-term screening to all investments, based on the ESG-related values of Norwegian citizens.
It is true that Norwegians, and Scandinavians more generally, are unusual, with a history of social and environmental awareness unmatched in most other parts of the world. But in Europe more widely there was positive news this year when the 2010 wealth report from the European Sustainable Investment Forum found the proportion of high-net worth Europeans insisting their investment portfolios are managed against sustainability metrics rose from 8% in 2007 to 11% in 2009. That represents 729 billion euros (US$936 billion), more than a third more than in 2007. Eurosif executive director Matt Christensen is excited, arguing that most of the wealthier investors start by “dipping their toes in the water” with just 1% of their assets – but may well increase the proportion if the experiments work out.
Let’s hope so, but I am not persuaded that the current level of SRI activity will exert sufficient leverage on the global capitalist system to achieve anything like the sustainability that premier Wen Jiabao aspires (or should aspire) to. So, yes, a warm welcome to the CSI ECPI China ESG 40 Equity Index – but I wonder if there is a Chinese language equivalent of the English proverb “One swallow doesn’t make a summer”? The uncomfortable fact remains that, for real progress, we need political heavy-lifting on a scale that most of our leaders still find unimaginable.
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