Increasing environmental and social awareness means it is imperative that IROs know how committed their company's are to progress
A growing focus on CSR has made it increasingly important for IROs to know how their company measures up in terms of its environmental and social commitments. Campaigning groups seeking to change corporate attitudes in these areas have long been aware of the power held by a firm's investors.
'It depends a bit on the sector the company is in - if it has a big consumer-facing brand, a consumer campaign is going to have greater impact,' explains Rob Harrison, editor of Ethical Consumer. 'But if it is, say, a mining company, then investor pressure is much more important. The most effective investor actions, studies have shown, are around new listings and fund-raising. There have been a number of successful campaigns, based in part on writing to the players and saying, If you buy this stuff, we're going to turn up on your doorstep.'
Increasingly, however, investors are making these decisions for themselves. A growing interest in alternative, clean energies has fueled the recent rise in the amount of money allocated to SRI funds. Assets in these funds reached €40.4 bn ($63.3 bn) in May 2008, according to figures from Lipper FERI, with 105 new SRI funds launched in Europe since the end of 2006. Lipper FERI highlights the countries behind the greatest number of SRI funds as Belgium, France and the UK.
'There's no doubt there's increasing interest in responsible investment - there are strong inflows into investment strategies that focus on environmental solutions,' notes Emma Howard Boyd, head of SRI at Jupiter Investment Management. Jupiter's Ecology fund, which was established in 1988 and was the first 'green' fund to be made available to retail investors, favors clean energy and waste management companies. It also has a number of 'ethical screens', sectors where it avoids putting its money.
'The stated criteria of the fund is that we won't invest in armaments, gambling, pornography, tobacco, alcohol or nuclear power generation, because of the huge issues involved in nuclear waste,' explains Howard Boyd.
A very good place to start
But ethically screening sectors for investment is only half the story. SRI is also about examining a company's treatment of its staff, policies on the environment and the location of its operations.
In June, Anglo American, the multinational mining giant, found itself on difficult ground when it announced an investment in Zimbabwe around the same time Robert Mugabe, the country's president, was earning international opprobrium by running an election in which he was the only candidate.
The opposition - which had won an earlier vote but failed to get an outright majority - pulled out of the second round vote, over what it said was a campaign of violence against its supporters. Mugabe's one-man election received much international media attention and prompted UK prime minister Gordon Brown to call on companies to 'reconsider' their positions in Zimbabwe.
Communications firm WPP, which has an interest in a Zimbabwean advertising agency with links to Mugabe, was said to be frantically looking to offload the business. Shell, which alongside BP supplies independent petrol pumps across the country, suggested to the press that it was also considering pulling out, and Barclays said it had suspended plans to expand its Zimbabwean operations.
But Anglo announced it was to invest $400 mn in Zimbabwe's Unki platinum mine. The company defended its investment, saying it was 'deeply concerned about the current political situation in Zimbabwe' and it condemned 'the violence and human rights abuses that are taking place', but made clear it would not be pulling out. Anglo employs more than 650 people at its mine, 'all of whose livelihoods would be jeopardized should the company withdraw from Zimbabwe,' the statement said.
Legal & General, Anglo American's biggest shareholder, and other large pension funds with interests in Anglo were said to be in consultation with the company over the issue, but Anglo insiders say they are not aware of anyone pulling out over the deal.
Digging holes
Extraction companies run into particular difficulties with SRI, often over environmental concerns but also, like Anglo, because of the places where they operate. The Burma Campaign UK, which seeks to discourage trade and investment in Myanmar while it is under military rule, has a long-running campaign against Total over the oil company's investment in the Yadana gas project in southern Myanmar. Total has been operating in the country since 1992.
Because of the difficulties associated with the sector, investment vehicles such as Jupiter's Ecology fund steer clear of extraction firms altogether. 'The performance of the extraction companies doesn't meet the criteria of the fund,' says Howard Boyd.
Not all SRI funds follow suit, but they do need to be convinced by the companies' policies. Raj Thamotheram, who heads the responsible investment team at AXA Investment Managers, agrees extraction firms have problems when it comes to SRI. 'ItÕs hard to be an extraction company and completely avoid operating in a country that has weak governance and human rights records,' he concedes. 'If you're looking for issuers that never invest in countries with poor human rights records, that would tend to rule out extraction companies.'
AXA, which operates five SRI funds - three in equities and two in bonds - screens investments based on a client's values, but for Thamotheram the 'really interesting' bit is pricing a company's socially responsible performance, mainly as extra-financial reporting is still a relatively new area for many businesses.
'If you ask about financial aspects of performance, a company's IR person will immediately be able to tell you what you need to know,' he explains. 'But if you ask about, for example, human capital management - which many CEOs say is their most important asset - they will usually have to go away to find out.'
Accentuate the positive
Organizations such as the Enhanced Analytics Initiative - a partnership between asset managers and asset owners that encourages independent research - are attempting to address the lack of analysis. Increasingly, companies themselves are also producing separate reports on their CSR activities.
'Sometimes companies give information away without meaning to,' Thamotheram says. 'For example, in the small to mid-cap base, companies that grow organically and don't downsize or upsize very quickly are interesting because they appear to ride out recessions better. You can also see when a company invests heavily in training, although you need to check the type of training and its value.
'In this more complex world where carbon has a price, you also need to look at a firm's carbon footprint. All investors say they are looking for good management but in this new globalized world, there are new competencies to look for.'
SRI has only really seen growth in the last few years and it still represents just a fraction of the market. Returns have also been shaky, with figures from Lipper suggesting that from June 2007 to June 2008, on average SRI funds saw negative growth of a little over -1 percent, so whether SRI can survive an economic downturn remains to be seen. But it's possible that 21st century public opinion and the threat of being 'doorstepped' will keep it alive.
'Will the asset owners want their fund managers to invest more responsibly?' Thamotheram asks. 'I hope so. Retiring into a world where this doesn't happen won't be much fun.'
