Report: Short-Term Investing Nature Inhibits Embrace of ESG

First State Investments in Australia has warned that the short-term nature and focus of financial markets is inhibiting consideration of environmental, social and governance (ESG) issues in capital allocation and could be detrimentally impacting long-term company and investment performance.

(June 30, 2011) — A new reportby Colonial First State Global Asset Management in Australia asserts thatenvironmental, social, and governance (ESG) factors must play a bigger role in investment decisions.

Research conducted by Colonial First State Global Asset Management (CFSGAM) revealed that the top rated ESG stocks in its Global Listed Infrastructure portfolio outperformed the bottom-rated stocks by more than 20% over a three year period to May 2010. The results give further weight to the argument that ESG factors and performance are interlinked, the report claimed.

In its fourth annual Responsible Investment Report, Australia-based First State, known as CFSGAM, said that the short-term nature of investing is inhibiting the consideration of ESG issues in their asset allocation decisions. Long-term, the firm said, investment performance could be harmed if ESG factors are ignored.

“As a fiduciary it is our responsibility to make the best possible investment decisions on behalf of our clients,” First State CEO Mark Lazberger stated. “Critical to that process is appropriate consideration of environmental, social and governance issues as these factors significantly impact long-term company performance.”

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

According to the report, First State — the fund management business of the Commonwealth Bank of Australia — has outperformed most other signatories of the Nations Principles for Responsible Investment (UNPRI) during 2010.

“It is pleasing that since signing the UNPRI in early 2007 we have made significant steps towards achieving this target and now sit in the top quartile in four of the six principles,” Lazberger said. “We are currently focusing on principles two and three and are actively seeking to achieve top quartile rankings across five of the six principles in 2011.”

Amanda McCluskey, Head of Sustainability and Responsible Investment added: “There is still a level of misunderstanding within the industry regarding the difference between socially responsible or ethical investing and integrated ESG management…We take this approach because pricing sustainability issues into every investment decision allows us to protect our clients against ESG-related risks and enhance the investment performance of our funds.”

The report follows a survey released June 13 of pension funds, foundations, and investment managements firms revealed that the majority of respondents saw global climate change as both a potentially significant investment risk and as an opportunity.

The Global Investor Survey on Climate Change: Annual Report on Actions and Progress 2010 was conducted by Mercer Investment Consulting.

Overall, the survey found that 98% of pension funds and foundations and 87% of asset managers believe that global climate change poses risks but also offers opportunities. It also found that 57% of pension funds and foundations and 80% of asset managers make specific reference to climate change risk in their investment policy. The results were belied somewhat, however, by the composition of the respondents. Those surveyed were members of the North American Investor Network on Climate Risk, the European Institutional Investors Group on Climate Change and the Australia/New Zealand Investor Group on Climate Change. Altogether, the respondents manage a combined total of more than $12 trillion.

The survey results accompany an increased push within parts of the industry to make ESG concerns more central to investor mindsets. Large asset owners like California Public Employees’ Retirement System (CalPERS) and California State Teachers’ Retirement System (CalSTRS) have headed the effort. Recently, those public pension plans were among several that signed a letter to the companies of the Russell 1000 index urging the companies to implement ESG concerns into their business models.

To contact the aiCIO editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

Widespread calls for Australia to establish a commodity-backed sovereign wealth fund are meeting stiff resistance from politicians and analysts who question the wisdom of such a fund.

(June 30, 2011) – Internal critics are striking back against domestic and international calls for Australia to establish a sovereign wealth fund (SWF) on the back of a commodities boom fueled by rising Asian demand.

Australia is faced with the question of what to do with the proceeds of a large surge in demand for its vast deposits of coal and iron ore. At the heart of the dispute is whether Australia should try to emulate Norway by establishing a sovereign wealth fund or rather impose a tax on mining profits as the best way of capitalizing on the boom.

In May, the International Monetary Fund (IMF) urged Australia to create a SWF to protect the country against a possible Asian market bubble. IMF director Anoop Singh said at the time that the revenue from the current resources boom should be saved “to ensure a more equal distribution of its benefits across generations and reduce long-term fiscal vulnerabilities from an ageing population and rising health care costs.”

The IMF’s suggestion came on the heels of similar advice offered by Pacific Investment Management Co. (PIMCO), the California asset management giant, about the utility of a creating a SWF, aiCIO has reported. Robert Mead, managing director and head of portfolio management at PIMCO, said in April that Norway’s Norges Bank Investment Management offered a good example for which Australia should follow. “The Norges bank model has obviously been a very successful model,” Mead said, adding that for Australia’s model, “quarantining the additional revenues raised from the resources boom should be fed into a long-term fund structure.”

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

Within Australia, however, decision makers are less receptive to the idea of a SWF. Australia’s treasurer and deputy prime minister Wayne Swan has dismissed arguments for a new SWF, saying that the government’s proposed 30% mining tax will serve the country better.

“I don’t think it makes sense at this stage of our development,” Swan said in a speech reported by Dow Jones Newswires. He said the economy needs capital and that creating an SWF would “starve the productive base of our economy from the use of that money.”

At a June 30 conference in Melbourne outgoing Australian Reserve Bank board member Warwick McKibbin echoed Swan’s concerns.

“Everyone seems to be focused on maximising the returns of the boom,” Dr. McKibbin said according to the Australian. “But we should be also aiming to minimise the risks, whether that is macro or climate policy. We don’t know what the future will bring so we should be trying to minimise risk.”

To contact the aiCIO editor of this story: Benjamin Ruffel at <a href='mailto:bruffel@assetinternational.com'>bruffel@assetinternational.com</a>

You have reached your limit of two free articles

Visit Homepage | Login | Subscribe