Far from ignoring issues such as the impact of climate change or the growth in social inequalities, there is a growing movement within the financial community to respond to these challenges by fostering responsible investments and businesses where long-term thinking is prioritised.
According to recent research by NASDAQ OMX, more than one-third of capital invested by asset managers in publicly-traded companies is currently held in portfolios for at least five years – a key measure for long-term investing – the highest level since the financial crisis.
Long-termism and responsible investing have found two key supporters in recent years. One being the Sustainable Stock Exchange (SSE) initiative where stock exchanges work together to create more sustainable capital markets through enhanced corporate transparency. Secondly, the growing number of institutional investors collaborating through the Principles for Responsible Investment (PRI) initiative to support responsible investment practices. PRI has grown significantly since its early days when a small group of 20 institutional investors representing $2tn launched it in 2006, supported by UN. The initiative now has 1,260 signatories representing $45tn in assets under management (AUM).
But how exactly that collective size translates in terms of share ownership in listed companies across the world, has been unknown until now. Recently, our organisations jointly conducted a study to uncover the actual presence of PRI signatories in companies in which they invest – the key factor in determining their potential to influence business behaviour. We were surprised by what we found.
In a worldwide sample of 379 listed companies with a combined market capitalisation of $19tn, our PRI equity ownership study revealed that signatories of the PRI on average hold nearly half of all the shares held by asset managers in those companies. The analysis focused on companies with optimum levels of ownership data available and that were representative of all sectors and major markets. Given that the formidable combined weight could be leveraged on companies where institutional investors are considered key stakeholders, this should give business leaders pause.
But can PRI investors become active owners and speak with one voice? A strong collaborative effort will be required, and this is perhaps the biggest challenge.
Having achieved sizeable presence in listed companies, PRI signatories should be able to influence those businesses to achieve a better environmental, governance and social (ESG) performance. From mitigating business impact on climate change to the implementation of long-term sustainable growth strategies, responsible investors have the opportunity to play a pivotal role in shaping corporate policy.
Rather than the regular interactions between investors and senior management in companies focusing merely on financial performance indicators, topics of particular concern to responsible investors could be raised. But to accomplish that, the first step is for investors to realise their collective power.
Secondly, they would need to use this knowledge to join forces and identify where they can be most influential in their corporate engagement. Investors can work together through the PRI’s collaborative platform, known as the Clearinghouse, engaging by company, issue, region or asset class. For example, the PRI’s coordinated engagement on managing risks in hydraulic fracturing, includes 41 institutional investors with a total AUM of $5.1tn. Current topics include executive remuneration, corruption, water quality and scarcity and supply chain risk.
The recent visit by a group of responsible investors to textile factories in Bangladesh following the tragic collapse of the Rana Plaza complex in 2013 is an example of how they are trying to make a difference. The purpose of the site visit was to engage with the garment industry and local producers in order to improve working conditions in the textile industry. There is clearly a great deal of work left to do, however this shows how responsible investors can use their influence to facilitate better working conditions in developing countries while reducing the supply chain risks of fashion retailers.
It is worth noting that PRI signatories’ presence is not felt equally across all regions and sectors. It’s stronger in companies listed in the UK, continental Europe, the Middle East and Africa. This reflects the fact that, with few exceptions, European and South-African financial institutions have led the responsible investment movement. Conversely, PRI ownership lags in Australia, Asia Pacific, and particularly in the US and Canada. Although, North America is expanding. In 2014, 23 new US investors signed on to the PRI, including Harvard Management Company, which manages the university’s $32bn endowment fund.
The study reveals that the presence of PRI signatories reaches the highest levels of asset manager ownership in sectors facing some of the greatest sustainability challenges: mining, industry and utilities. For example, PRI signatories own an average of 49% of the shares held by asset managers in 58 industrial companies included in the study and an average of 50% asset manager ownership in 28 companies in the basic materials sector.
Across all sectors and countries, there is a growing desire among many investors to embed sustainability into their investment decision-making process. There is also the opportunity for company executives to implement long-term, value-driven strategies and for investor relations professionals to prioritise communication with their growing base of responsible investors. This will allow them to attract more long-term shareholders which will naturally result in lower stock price volatility.
The silent revolution has arrived. There is a mandate for change; the challenge for responsible investors, and the companies they own, is achieving the right pace for that change.
Source: The Guardian