One Year On: Global Compact Maps
Progress on Mainstreaming Environmental, Social Considerations
Source:
SocialFunds.com
NEW YORK, Nov. 16, 2005 - Over a year ago, the United Nations
Global Compact released a
report titled Who Cares Wins that documented the ushering in
of the era of transfusing socially responsible investing (SRI) practices
into the lifeblood of mainstream financial institutions. Recently, the
Global Compact issued a
follow-up report -- "Who Cares Wins": One Year On -- which
reviews and maps progress over the past 12-odd months on the integration
of environmental, social, and governance (ESG) considerations into
traditional investment analysis. Perhaps more importantly, late last
month the International Finance Corporation (IFC)
issued a
conference report detailing the Aug. 25, 2005
meeting at which the One Year On report (which the IFC
collaborated in producing) was released.
"Encouragingly, the past twelve months have witnessed a number of
significant developments within the financial sector, which taken
together represent an important step towards to the integration of ESG
issues into analysis, asset management and securities brokerage," states
the One Year On report.
The report points to a number of societal developments driving
increasing uptake of ESG issues, such as the January 2005 implementation
of the European Union Emissions Trading Scheme (ETS)
bolstering a carbon market and the February 2005 implementation of the
Kyoto Treaty. The focus of the report, however, is to "map" investment
arena developments pushing or illustrating ESG uptake.
"In at least some areas, ESG-related investment has achieved a
fashionable status in recent months," the report states. "For example,
in a trend mildly reminiscent of the internet era, it has been possible
for a number of conceptual 'clean technology' companies, lacking either
tangible revenues or assets, to gain easy access to investors' capital."
"Whilst attractive returns have helped stimulate investor interest,
there is a danger that this interest could rise and fall along with the
returns, unless the underlying spirit of ESG integration is properly
embedded," the report continues. "It is important to ensure that the
current vogue for clean technology investment does not overshadow
consideration of other environmental, social and governance aspects."
The sheer volume of major developments "mapped" in the appendix,
correlated to original Who Cares Wins recommendations as well as
unfinished business, impresses upon readers the significant ground
traversed since June 2004. Examples of key initiatives include the
October 2004 launch of the Enhanced Analytics Initiative (EAI),
the January 2005 World Economic Forum (WEF)/AccountAbility publication
of
Mainstreaming Responsible Investment, and the May 2005
Investor Network on Climate Risk (INCR)
"Call for Action."
If the One Year On report paints the backdrop, the conference
report fills in the details with commentary and opinion from the actors
who are actually implementing the changes.
"We are today at a critical juncture: ESG considerations could attain
unstoppable momentum, but could also be pushed back by powerful forces
interested in short-term gains only (majority of institutional investors
was seen as behaving this way; hedge funds were mentioned)," the report,
prepared by Ivo Knoepfel of
onValues Investment
Strategies and Research, states in note form.
"A key challenge was also seen in better institutionalizing financial
institutions' commitment toward ESG issues, versus the current status of
single individuals or teams leading the implementation process," the
report continues.
IFC environment and social development department director Rachel Kyte,
who noted that a "tipping point" on the mainstreaming of ESG issues may
be approaching, stressed that many ESG issues are even more crucial in
an emerging market context.
Kyte "often observes a disconnect between different departments within
the same financial institution: while the project finance people are
often well aware of the considerable environmental and reputational
risks entailed in certain activities, other investment banking or asset
management departments seem to ignore them," the report states.
Extending this line of reasoning,
Goldman Sachs managing
director Anthony Ling opined that "pigeonholing ESG as a separate
category will kill it" whereas "ESG will become mainstream within a
five-year period" if consideration of these issues proliferate
throughout organizations.
Details of Ling's keynote presentation represent the centerpiece of the
conference report. Mr. Ling pointed out that combined commission of the
Enhanced Analytics Initiative, a consortium of institutional investors
pledging five percent of commissions to sell-side analysts producing the
best research on ESG issues, fall well below that of a big hedge fund.
The mainstream firms (including
Citigroup, Deutsche Bank,
Dresdner Kleinwort Wasserstein (DrKW), Goldman Sachs,
HSBC,
JPMorgan,
Morgan Stanley,
and UBS) who have set up
or significantly expanded ESG teams in the last year are all based in
London, according to Ling. He characterized the results of the United
Nations Environment Program Finance Initiative (UNEP
FI)-World Business Council for Sustainable Development (WBCSD)
Generation Lost survey showing how little young financial
analysts care for ESG issues represents a "slap in the face for all of
us and highlights the need for active, personal leadership by those
present in the room."
"To support awareness-building among young professionals entering the
industry, one participant proposed that all conference attendants commit
to giving a presentation at a business school or professional training
course on ESG issues until we meet again next year," the report states.
"There was strong support for this proposal."
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