The TakeAway: CalPERS to factor ESG issues in all its funds by mid-2011; GRI announces work on fourth generation reporting guidelines; and a BSR poll shows increased support for CSR/sustainability.
Three developments this week demonstrate the rising acceptance of incorporating environmental, social, and governance (ESG) considerations into investor and corporate decision making.
CalPERS and Sustainable Investing | On Wednesday, the Wall Street Journal described the growing popularity of merging quantitative investing computer models with ESG analytics. Clark McKinley, a spokesman for CalPERS, the nation’s largest public pension fund, said the $218 billion pension giant plans “to incorporate ESG across the board” through a quantitative approach by the “middle of next year” (according to a subsequent CalPERS Tweet.)
While quants might appear to be seeking to redeem themselves, they’re also responding to new business opportunities. Some critics accuse them of contributing to the market meltdown by missing systemic ESG risks, which is what MSCI ESG Research’s Alan Petrillo blogged last July, stating that many investors consider ESG key to long-term value creation. Yet sustainability investing also represents an untapped business opportunity, particularly with improvements in ESG data that make it quant-friendly for portfolio construction.
The WSJ reports that a number of new funds blend quantitative methods with socially responsible criteria—such as the $10 million ESG quant fund built this year for CalPERS by Quotient Investors LLC, which gained 9.4% in the first 10 months of this year, beating the 8.5% gain in the benchmark Russell 1000 index. CalPERS agreed to allocate a small part of their assets managed by Quotient to the new fund, the beginning of a deliberate strategy that will extend ESG considerations beyond equity funds into other asset categories. No other major institutional investor has done this, which demonstrates the growing acceptance and appeal of qualitative measures to improved long-term performance.
Meanwhile, other money managers – including Advanced Investment Partners, Trillium Asset Management, Auriel Capital Management and State Street Global Advisors – are stepping into this space, recognizing that ESG considerations reduce volatility and can advance sustainability goals.
But CalPERS will take it further as they apply ESG considerations to fixed income, private equity, real estate, and other asset classes. CalPERS can take a cue from those who’ve advocated for “Mission Investing” and make important contributions to what has yet to materialize: best practices, across a portfolio, for advancing sustainable prosperity for good.
GRI and G4 | Also on Wednesday, the Global Reporting Initiative (GRI) took another step toward mainstreaming ESG by launching a process for drafting and launching the fourth generation (G4) of its sustainability reporting guidelines by the end of 2012. The GRI’s announcement that it was revising the G3 Guidelines fits within its broader commitment to integrated reporting (the blending of financial with ESG metrics) and its co-leadership, of an framework development process organized by the International Integrated Reporting Committee (IIRC). The G4 also will jump more fully into the digital era, to meet demands for real-time reporting and engagement.
Business Leaders High on Sustainability | Yesterday, Business for Social Responsibility (BSR) released the State of Sustainable Business Poll 2010 at its Annual Conference in New York City. Conducted by GlobalScan, the poll surveyed 377 respondents from a majority of BSR’s global network of more than 250 member companies. More than eight in 10 respondents (84 percent) are somewhat or very optimistic that global businesses will embrace CSR/sustainability as part of their core strategies and operations in the next five years, according to the BSR press release. Almost all (94%) will maintain or increase their CSR/sustainability budget in the year ahead. Top issues cited by business leaders for their companies in the coming year: climate change, workers’ rights, and human rights.
“When the recession hit with full force two years ago, we urged our members to stick with sustainability as a key to achieving long-term business success,” said BSR President and CEO Aron Cramer. “It’s very encouraging to see that, even in a world still marked by instability and change, they’re staying the course.”