There is an increasing awareness across the globe that businesses must run on the principles for responsible investment if they must remain sustainable in the long run. This global trend is gradually taking a foothold in Africa, as stakeholders gathered in Lagos, recently, to discuss the way forward, reports Bamidele Famoofo
Responsible investment is an approach to managing assets, whereby investors include environmental, social and governance (ESG) factors in their decisions about what to invest in; and the role they play as owners and creditors. The ultimate goal is to ensure that businesses run on a sustainable basis in the long run, as the interest of all stakeholders are put into consideration.
Head, Africa & Middle East at PRI, Ms. Nicole Martens, explained that there was a growing recognition in the financial industry and in academia that ESG factors influence investor returns.
‘’We believe that an economically efficient, sustainable global financial system is a necessity for long-term value creation. Such a system will reward long-term, responsible investment and benefit the environment and society as a whole.’’
She made the disclosure at an investors breakfast session organised by InfraCredit in partnership with PRI and Verod Capital Management in Lagos last week Wednesday. The event themed: ‘’ESG Integration and Responsible Investment,’’ had in attendance investors, fund managers and other stakeholders in the business world.
Martens argued that ESG issues in investment analysis and decisions would help investors to better manage risks and improve returns in the medium to long term.
According to the PRI representative, an analysis of over 2,000 academic studies on how ESG factors affect corporate financial performance found “an overwhelming share of positive results,” with just one in 10 showing a negative relationship.
‘’PRI-commissioned research indicates that engaging with companies on ESG issues can create value for both investors and companies, by encouraging better ESG risk management and more sustainable business practices,’’ she claimed.
Her words: ‘’Beneficiaries and clients are increasingly calling for greater transparency about how and where their money is invested. This is driven by growing awareness that ESG factors influence company value, returns and reputation, and by an increasing focus on the environmental and social impacts of the companies they are invested in. Negative screening, which excludes certain sectors, companies or practices, is the most widespread approach to integrating values in a portfolio or fund.’’
Considering the role of regulators in fostering responsible investment, PRI noted that since the mid-nineties, responsible investment regulation had increased significantly, with a particular surge in policy interventions since the 2008 financial crisis. Martens noted that regulatory change has also been driven by a realisation among national and international regulators that the financial sector can play an important role in meeting global challenges such as climate change, modern slavery and tax avoidance.
Case for ESG
High-profile examples of financially material environmental, social or governance incidents were cited by the forum, reinforcing the need for corporate organisations to adopt the principles for responsible investment. First was the Deepwater horizon oil spill in 2010 by oil giant British Petroleum (BP), which cost the multinational company a US$53.8 billion pre-tax charge. Another was automobile giant, Volkswagen, which lost €27.4 billion in penalties and fines for rigging 11 million diesel vehicles to pass emissions tests.
Most recently was the case of Facebook that sees billions wiped from its market value after Cambridge Analytica was able to harvest personal data from 87 million users without their consent.
Meanwhile, pundits have argued that there were several forces driving the growth of responsible investment. According to the experts, they include the materiality factor, which explains the increasing recognition that ESG factors can affect risks and returns; client demand which talks about the increasing demands from beneficiaries and clients for greater transparency about how their money is invested; and regulatory factor which considers the need for more guidance for regulators that considers that ESG is part an investment fiduciary duty.
The responsible investment industry is evolving rapidly, resulting in misconceptions about what it entails, including investing in a specific investment strategy or product. But experts have said responsible investment does not necessarily require investing in a specific strategy or product. It simply involves including ESG information in investment decision-making and stewardship practices, to ensure that all relevant factors are accounted for when assessing risk and return. Exactly how an investor practices responsible investment varies widely
Another misgiving about responsible investment which the experts demystified was the belief that adopting the principles in business ventures leads to lower investment returns. ‘’Responsible investment does not require sacrificing returns; it should, in fact, enhance risk and return characteristics. Investors apply a range of techniques to identify risks and opportunities that might remain undiscovered without the analysis of specific ESG data and broad ESG trends.’’
Experts at the breakfast meeting said responsible investing is not the same thing as sustainable, ethical, and socially responsible and impact investing as some believes. ‘’There are many terms associated with the plethora of investment approaches that consider environmental, social and governance issues. Most lack formal definitions and they are often used interchangeably. A key to understanding how responsible investment is broader than these concepts is that where many make moral or ethical goals a primary purpose, responsible investment can and should also be pursued by the investor whose sole focus is financial performance,’’ the experts explained.
The PRI is the world’s leading proponent of responsible investment. It works to understand the investment implications of environmental, social and governance (ESG) factors and to support its international network of investor signatories in incorporating these factors into their investment and ownership decisions. The PRI acts in the long-term interests of its signatories, of the financial markets and economies in which they operate and ultimately of the environment and society as a whole.
The PRI is truly independent. It encourages investors to use responsible investment to enhance returns and better manage risks, but does not operate for its own profit; it engages with global policymakers but is not associated with any government; it is supported by, but not part of, the United Nations.
The whole idea about PRI started in early 2005, when the then United Nations Secretary-General Kofi Annan invited a group of the world’s largest institutional investors to join a process to develop the Principles for Responsible Investment. A 20-person investor group drawn from institutions in 12 countries was supported by a 70-person group of experts from the investment industry, intergovernmental organisations and civil society.
The principles were launched in April 2006 at the New York Stock Exchange. Since then the number of signatories has grown from 100 to over 2,300.
Head, Credit Risk, InfraCredit, Mr. Chidi Mike-Eneh, said InfraCredit signed up to the UNPRI treaty and as part of its mandate to develop the market and support sustainability. ‘’This is an awareness event to help businesses to incorporate the principles of environmental, social and corporate governance. Part of what we came here to do was to share our views as to what responsible investing looks like. When you talk about responsible investment, what should come to your mind is building a sustainable business- a business that will outlast you. It is a business that will generate returns that is sustainable. In order to achieve this, you need to incorporate the ESG factors into your business from the scratch’’, he said.
Chief Executive Officer, InfraCredit, Mr. Chinua Azubike, explained that, transitioning the global economy to a sustainable development path had become an existential imperative. “At InfraCredit, we believe that the bond markets have an especially important role to play as the largest source of long-term investment capital; we expect to continue to play a catalytic role in promoting the use of sustainable investment tools such as green bonds to finance Nigeria’s transition to a low-carbon country,” he noted
Also speaking, Chief Executive Officer/Managing Director, Verod Capital Management, Mr. Danladi Verheijen, said his company was one of those that signed up to the applying the principles for responsible investment at the very early stage in Nigeria because it believed it was the right thing to do. “Why should l need to be told that l should not invest in a company that pollutes its environment, why should l be told that l should not invest in a company that will pay minimum wages, that does not damage the environment for its local community, that does not practice corporate governance e.g. setting up a proper board of director, having a proper account etc.?,’’ he queried.