The sustainability challenge
Ingo Speich (pictured), senior portfolio manager sustainable investment for Union Investment argues that in light of evolving EU legislation, fund managers and investors in Europe will face increasing pressure to adopt socially responsible investing (SRI) standards – encompassing both areas of environmental, social and governance (ESG) factors as well as sustainability.
“Sustainable investment strategies in the broadest sense have increased massively. In the past, only churches and foundations took these factors into account; today, even pension funds have to concern themselves with it,” says Speich. In other words, a basic bottom-up allocation strategy is increasingly complemented with social, environmental and governance factors.
This tendency is partly driven by attempts to harmonise European standards on SRI. In spring 2014, the European Commission proposed an extension of the Shareholders Rights Directive, which would require asset managers to provide biannual reports to investors on how their investment strategy complies with long term objectives.
A decision on implementing this change at the EU level is likely this year, after which it will have to be implemented into national law within 10 months. Being a directive, it remains open to member states to decide how exactly they will implement the requirements. However, the move is expected to increase the regulatory pressur on managers – particularly passive managers.
For Union Investment, sustainable investment means in practice that the firm has a blacklist of companies which are generally excluded from sustainable investment funds, including companies producing cluster bombs, companies with accounting scandals or blatant human rights abuses.
But for Speich, sustainability investment goes much further than a mere exclusion of companies: “Being an active shareholder, visiting general meetings and regularly meeting board members are crucial when trying to convince companies of a more sustainable business model,” he argues. In the past year, his team has conducted 1,200 general meetings and voted against the board in 10% to 15% of the votes.
“Attending and speaking at general meetings is just the tip of the iceberg, we try to meet the CEO of a company we invest in at least once per year,” Speich stresses. “We lobbied against building nuclear power plants in areas at risk of earthquakes years before Fukushima,” Speich notes.
In other cases, his team actively encourages multinationals to cease cooperation with weapon factories. “They didn’t have a convincing explanation why this arrangement would be beneficial to shareholders in the long run,” he argues.
Besides positive publicity, there is in many cases a material interest foran investor to adopt an SRI framework, Speich adds. A good example is deep-sea drilling or fracking: “Risk scenarios are often inaccurately priced and in reality significantly higher.”
With European law becoming nincreasingly important, the question arises whether he would consider lobbying institutions directly. “I have looked towards Brussels, but it remains rather complicated to exercise influence as the opinions of interest groups are so divergent. We think it is more efficient to start off by lobbying companies we invest in directly.” In order to do so, he even teams up with other asset managers invested, with the aim of making the exclusion of certain practices, for example in fishing, international industry standard.
Looking forward, he predicts that the harmonisation will put growing pressure on individual investors. “There may still be a difference by country but the general thought is very much the same across Europe: in future, there is no getting around SRI.