Cambridge Judge Business School recently hosted a one-day summit on responsible investment. The summit was organised in collaboration with the Strategy Council of the Norwegian Government Pension Fund Global (GPFG) and the Centre for Endowment Asset Management, based at Judge.
The Strategy Council has been asked by the Norwegian Ministry of Finance to review the Norwegian GPFG's approach to responsible investment. The summit brought together experts on responsible investing in order to deepen the Strategy Council's awareness of current knowledge and experience in this area, especially around themes like alternative approaches, comparison across different types of funds and international best practice.
The Norwegian GPFG, currently recognised as the largest state-owned fund managing nearly $750bn, was one of the first to take ethical, environmental and social issues into account in fund management. The Fund is managed on behalf of the Norwegian people and their common ethical values form the basis of responsible management of the assets. The overriding objective is to ensure a good long-term return from which future generations can benefit and the fund is managed in the belief that good financial returns over time are dependent on sustainable development in economic, environmental and social terms and on financial markets that are functioning well.
There are a number of reasons to take note:
Firstly, sovereign wealth funds and other large investors wield ever greater influence due to their increasing power and size.
Secondly, post credit crunch we may be seeing a cultural change in economics and capital markets identified by a move to integrated reporting. Integrated reporting is a new approach designed to allow investors to make insightful connections between key pieces of corporate information. Described another way it identifies intangible drivers of financial metrics by classifying capital as financial, manufactured, intellectual, human, social & relationship and natural. This may in turn see more emphasis on social and environmental value.
Two recent but unrelated events in April may be mark a development in this process.
New research published by the Carbon Tracker Initiative and the Grantham Research Institute on Climate Change and the Environment at London School of Economics and Political Science revealed that despite fossil fuel reserves already far exceeding the carbon budget to avoid global warming of more than 2°C, $674 billion was spent last year finding and developing new and potentially stranded assets. This huge annual spend on 'unburnable' fossil fuel assets may be signalling a failure on the part of financial markets to recognise huge financial risks on the balance sheets of the major oil and other resource companies.
The other event was the announcement of a change in the calculation of US GDP figures. Going forward this will include the contribution made by spend on research & development, attributing a value for intellectual property and the contributions of the creative class in the movie, tv and music industries.
By framing fossil fuels as potentially 'stranded assets' thereby better seeing the integration of natural capital on corporate balance sheets and by finding a better way of integrating the value of intellectual capital or R&D in company accounts may be a step towards the goal of integrated reporting.
More widely, since the credit crisis of 2008-2009, society at large is putting the corporate sector under more scrutiny and pressure. This was seen initially in concerns over excessive executive remuneration and currently in anger over corporate tax evasion and aggressive tax avoidance.
The traditional approach to ethical investment focussed predominantly on moral issues, such as pornography, alcohol, tobacco and arms manufacture, and by excluding certain sectors and companies from portfolios. Today 'responsible investment' more broadly describes the ethos of investors who wish to use a broader range of methods such as company engagement, voting and integration in order to achieve social goals.
Initiatives like the UN Principles for Responsible Investment are seeing fund managers increasingly considering ESG (environmental, social and corporate governance) risks in their investment decision making and ownership practices. At a time of ever shortening investment holding periods this is a welcome reminder for investors to consider longer time horizons. There is also evidence, highlighted in a recent award winning research paper on active ownership of company outperformance following environmental, social as well as governance engagements.
Responsible investment principles are moving towards the mainstream and may already have arrived. The Norwegian GPFG is the ultimate long term investor and as the world's largest investor the Strategy Council's report on its approach to responsible investment, due at the end of 2013, should make interesting reading.