Capturing Responsible Investment

Corporation’s role in mitigating risk to attract investor assets

By Jerry Moskowitz 

A great deal of attention has been focused lately on the idea of socially responsible investment (SRI). According to an annual report from the Social Investment Forum, approximately $1 of every nine under professional management in the U.S. is involved in SRI. Assets under management linked to SRI in the U.S. alone reached $2.71 trillion by the end of 2007. This number represents 18 percent growth from since 2005, compared with 3 percent growth across the broader investment universe, according to the same report.

Many U.S. companies have already identified the trend toward responsible investment and are well aware of the fact that capturing these assets depends on pursuing a corporate responsibility policy. The challenge is to identify what types of “responsibility” investors care about most. This task is not as simple as it would seem. The term “socially responsible investment” has traditionally referred to a values-based investment strategy where negative screens are applied to an investor’s portfolio. Commonly, “sin stocks” such as alcohol, tobacco, weapons and/or gambling were simply removed from the portfolio depending on the investor’s values and priorities.

Modern responsible investment often drops the “S” and is simply referred to as “RI,” meaning “responsible investment.” This investment process considers the social and environmental consequences of investment, but does so in the context of financial analysis. In other words, investors are assessing the social and environmental risks associated with their investments, and are beginning to adapt their investment strategies to minimize those risks.

In addition to some attention being focused on corporate governance, human rights, supply chain labor standards and countering bribery, investors are expressing particularly deep concern about climate change risks. While individual shareholders share similar concerns about climate change risk and carbon emissions, it is the institutional investors--with large amounts of assets to invest--who increasingly are pressuring companies to take action to minimize risk and maximize opportunities associated with climate change.

One of the ways that they are achieving this goal is through public advocacy groups and global summits. For example, an investor advocacy group called the Carbon Disclosure Project (CDP) unites some 385 institutional investors with about $57 trillion in assets under management (AUM). Their aim is to persuade companies to freely disclose the information that investors need to determine how their investments will be affected by climate change risk.

The CDP annually asks the world’s top publicly traded companies to fill out a survey disclosing information such as carbon emissions. Because the information request is written on behalf of all 385 investors, who often hold shares in their companies, corporations are compelled to respond. In fact, the CDP expects a 77 percent response rate in 2008.

Other recent initiatives include the UN Principles for Responsible Investment and the CERES Summit on Climate Risk. The UN principles broadly address environmental, social and governance (ESG) issues that increase portfolio risk, and were signed by 2,000 institutional investors, asset managers and professional service partners representing $10 trillion in AUM globally.

At the CERES summit on Climate Risk, 50 U.S. and European institutional investors, including top pension funds, state treasurers and comptrollers from 12 states, pledged to invest $10 billion in clean technology opportunities over the next two years. They established several policy goals, including a push for the Securities Exchange Commission to require that pubic companies provide full disclosure of climate change risks.

With a clear message that ESG issues, particularly those having to do with climate change risk, are top-of-mind for investors, companies have no choice but to react. To attract responsible investment dollars, companies must communicate detailed goals, policies, processes and progress reports to demonstrate that they are meeting international CSR standards and best practices. Often, companies without internal capabilities will hire outside consultants to assist with this process.

Others seek inclusion in responsible investment market indexes, which pre-screen companies to ensure that they meet accepted global standards. Because these indexes are used by investors as benchmarks and as the base for a range of structured products, actively managed funds and tracker funds, inclusion in the index helps companies to attract SRI funds.

Some indexes, such as the FTSE4Good series, also engage with companies on how to modify their behavior in order to become part of the index. The engagement process guides companies by setting specific goals and assessing the company’s progress in their efforts to meet climate change and other SRI criteria. The process is inclusionary, meaning that companies are encouraged to meet accepted responsibility standards and gain entry into the index. This represents a marked departure from exclusionary screens that were once the standard in SRI. Today, if a company can demonstrate responsible behavior, whether through its own efforts, or by gaining inclusion in an index, it will be able to attract responsible investment funds.

Jerry Moskowitz is President, FTSE Americas. FTSE’s flagship index, the FTSE Global Equity Index Series (GEIS), covers 98 percent of the world’s total investable market capitalization and includes a broad range of traditional and alternative asset-class indexes. FTSE’s responsible investment series--the FTSE4Good Index Series and the FTSE Environmental Technology Index Series--have been designed to measure the performance of companies that meet globally recognised corporate responsibility standards, and to facilitate investment in those companies.