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October 02, 2009
Investment Advisors Explore Ways to Incorporate ESG Issues into Their Services
    by Robert Kropp

The Boston College Institute for Responsible Investment produces a paper that summarizes the concepts and goals explored in a meeting of investment consultants and asset managers.

In April, the Boston College Institute for Responsible Investment convened a meeting of 35 investment consultants and asset managers, well as other stakeholders, on the "premise that there are an increasing number of investors institutional and individual who seek investment value, and environmental, social, and governance (ESG) benefits, through the incorporation of ESG information into their investment decisions, referred to as responsible investing."

In retrospect, the meeting seems to have been well-timed, considering developments surrounding corporate ESG disclosure, and the advisability of incorporating ESG issues into investment decision-making, that have occurred since then. In July, the Social Investment Forum (SIF) submitted a proposal to SEC Chairman Mary Schapiro, calling for "a uniform standard for mandatory ESG reporting using the Global Reporting Initiative's (GRI) framework," that has been signed by more than 80 domestic and international organizations.

Also in July, the United Nations Environment Program Finance Initiative (UNEP FI) issued a report entitled Fiduciary Responsibility: Legal and Practical Aspects of Integrating Environmental, Social and Governance Issue into Institutional Investment (Fiduciary II), in which it states, "Advisors to institutional investors have a duty to proactively raise ESG issues within the advice that they provide, and that a responsible investment option should be the default position."

Furthermore, according to Fiduciary II, investment advisors that fail to incorporate ESG issues into their investment services face "a very real risk that they will be sued for negligence."

Steven Lydenberg, Chief Investment Officer of Domini Social Investments, told, "Investment consultants serve as intermediaries between institutional investors and money managers. They are gatekeepers, and have immense influence on the institutions. Their familiarity with ESG and the options available is crucial."

According to Lydenberg, the intention behind the April meeting at Boston College was to "Cultivate interest and understanding among consultants about what is going on in the social investment world. The intent of the meeting was not to define responsible investing (RI), but to survey current practices in the field."

Indeed, a point made in a recently published paper about the meeting entitled The Evolution of Responsible Investment Consulting was that "the field of responsible investment does not to date have a common language or clearly defined metrics." Instead, several motivations for social investment were identified at the meeting.

Investors may believe that investment in sustainable companies offers opportunities for long-term outperformance, and may want to find products that capitalize on social or environmental macrotrends. They may want their investments to achieve beneficial social or environmental ends that align with their values, and may desire to use shareowner rights to engage with companies on ESG issues. Finally, investors may seek to reduce regulatory and reputational risk.

Attendees at the meeting agreed "that a relatively robust universe of RI products either available or coming to market now exists," although clear definitions of what constitutes RI products are lacking. In the absence of clear definitions of RI products, the ability to apply a consistent ratings system to them faces challenges. According to the paper, many attendees "felt the lack of objective metrics was hindering the development of RI among institutional clients." On the other hand, mission investors did not seem to find the lack of metrics or rating to be limiting, according to the investment consultants who work with them.

Because one fundamental role of investment consultants is develop asset allocation strategies with their clients, the question of relating RI to asset allocation strategies played an important role in the conversations that took place at the meeting. Attendees identified several problems they have had to confront when seeking to incorporate RI into the investment strategies of their clients.

As a still-emerging field, RI products often have a short track record, which has led some consultants to eliminate them from consideration. Furthermore, the traditional asset allocation model views the ESG issues that form the heart of RI investment to be tangential to purely financial considerations, and the research tools needed to assess ESG factors are yet to be fully developed. Finally, according to the paper, a new allocation framework that takes ESG considerations into account in the construction of entire portfolios may be necessary.

The paper listed several ideas that attendees though were worthy of further consideration. The ideas include the formation of a sustained network of consultant practitioners, working groups on benchmarking, ratings, and social impact, and publicizing aspects of the discipline of RI consulting. Attendees also found that an open-source catalog of RI managers and products across asset classes could be helpful.

Lydenberg described the meeting as "An exploratory conversation to open dialogue among people who do not normally have the chance to talk with each other."

"We hope this was the start of a series of conversations among consultants," he said. In fact, the paper noted that "Research into the experiences of asset owners, managers and consultants, with a community beyond just those who attended this first meeting, might expand on these initial impressions of the field, and clarify the opportunities for, and barriers to, the evolution of responsible investment consulting."

"This initial conversation should help spur new research, network-building and collaboration among consultants and other stakeholders, and help shape this emerging field," the paper concluded.


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