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November 10, 2005
One Year On: Global Compact Maps Progress on Mainstreaming ESG Considerations
    by William Baue

Two recent reports paint a vivid picture of developments over the past year on integrating environmental, social, and governance considerations into traditional financial analysis.


Over a year ago, the United Nations Global Compact released a report entitled Who Cares Wins that documented the ushering in of the era of transfusing socially responsible investing (SRI) practices into the lifeblood of mainstream financial institutions. Recently, the Global Compact issued a follow-up report--"Who Cares Wins": One Year On--which reviews and maps progress over the past 12-odd months on the integration of environmental, social, and governance (ESG) considerations into traditional investment analysis. Perhaps more importantly, late last month the International Finance Corporation (IFC) issued a conference report detailing the August 25, 2005 meeting at which the One Year On report (which the IFC collaborated in producing) was released.

"Encouragingly, the past twelve months have witnessed a number of significant developments within the financial sector, which taken together represent an important step towards to the integration of ESG issues into analysis, asset management and securities brokerage," states the One Year On report.

The report points to a number of societal developments driving increasing uptake of ESG issues, such as the January 2005 implementation of the European Union Emissions Trading Scheme (ETS) bolstering a carbon market and the February 2005 implementation of the Kyoto Treaty. The focus of the report, however, is to "map" investment arena developments pushing or illustrating ESG uptake.

"In at least some areas, ESG-related investment has achieved a fashionable status in recent months," the report states. "For example, in a trend mildly reminiscent of the internet era, it has been possible for a number of conceptual 'clean technology' companies, lacking either tangible revenues or assets, to gain easy access to investors' capital."

"Whilst attractive returns have helped stimulate investor interest, there is a danger that this interest could rise and fall along with the returns, unless the underlying spirit of ESG integration is properly embedded," the report continues. "It is important to ensure that the current vogue for clean technology investment does not overshadow consideration of other environmental, social and governance aspects."

The sheer volume of major developments "mapped" in the appendix, correlated to original Who Cares Wins recommendations as well as unfinished business, impresses upon readers the significant ground traversed since June 2004. Examples of key initiatives include the October 2004 launch of the Enhanced Analytics Initiative (EAI), the January 2005 World Economic Forum (WEF)/AccountAbility publication of Mainstreaming Responsible Investment, and the May 2005 Investor Network on Climate Risk (INCR) "Call for Action."

If the One Year On report paints the backdrop, the conference report fills in the details with commentary and opinion from the actors who are actually implementing the changes.

"We are today at a critical juncture: ESG considerations could attain unstoppable momentum, but could also be pushed back by powerful forces interested in short-term gains only (majority of institutional investors was seen as behaving this way; hedge funds were mentioned)," the report, prepared by Ivo Knoepfel of onValues Investment Strategies and Research, states in note form.

"A key challenge was also seen in better institutionalizing financial institutions' commitment toward ESG issues, versus the current status of single individuals or teams leading the implementation process," the report continues.

IFC Environment and Social Development Department Director Rachel Kyte, who noted that a "tipping point" on the mainstreaming of ESG issues may be approaching, stressed that many ESG issues are even more crucial in an emerging market context.

Ms. Kyte "often observes a disconnect between different departments within the same financial institution: while the project finance people are often well aware of the considerable environmental and reputational risks entailed in certain activities, other investment banking or asset management departments seem to ignore them," the report states.

Extending this line of reasoning, Goldman Sachs Managing Director Anthony Ling opined that "pigeonholing ESG as a separate category will kill it" whereas "ESG will become mainstream within a five-year period" if consideration of these issues proliferate throughout organizations.

Details of Mr. Ling's keynote presentation represent the centerpiece of the conference report. Mr. Ling pointed out that combined commission of the Enhanced Analytics Initiative, a consortium of institutional investors pledging five percent of commissions to sell-side analysts producing the best research on ESG issues, fall well below that of a big hedge fund.

The mainstream firms (including Citigroup, Deutsche Bank, Dresdner Kleinwort Wasserstein (DrKW), Goldman Sachs, HSBC, JPMorga n, Morgan Stanley, and UBS) who have set up or significantly expanded ESG teams in the last year are all based in London, according to Mr. Ling. He characterized the results of the United Nations Environment Programme Finance Initiative (UNEP FI)-World Business Council for Sustainable Development (WBCSD) Generation Lost survey showing how little young financial analysts care for ESG issues represents a "slap in the face for all of us and highlights the need for active, personal leadership by those present in the room."

"To support awareness-building among young professionals entering the industry, one participant proposed that all conference attendants commit to giving a presentation at a business school or professional training course on ESG issues until we meet again next year," the report states. "There was strong support for this proposal."

 

 
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