Money talks: Concern for biodiversity pressed on boardrooms by new breed of fund managers

02/10/04

'Socially responsible investment' fund managers now wield $640 billion in UK alone

A new breed of fund managers looking to pressure businesses to improve social, environmental and ethical performance, a phenomenon started in 1999, now wield more than $640 billion in clout in the UK alone – more than 12% of all managed investments in that nation, according to experts at a United Nations forum.

One firm, Insight Investment, is using its $120 billion of managed assets specifically to leverage better corporate practices related to biodiversity among extractive industries (oil and gas, mining and minerals), part of a radically changing global landscape confronting corporations – especially those in need of access to new territories and resources.

The new statistics showing the strength of fund managers pursuing socially responsible investment (SRI) represent one of several signals in boardrooms that green thinking is essential to corporate well-being.

"Meaningful engagement of the private sector in addressing biodiversity and other environmental concerns has been elusive until now and confined to isolated instances. However, this is about to change," says A.H. Zakri, Director of the UNU Institute of Advanced Studies, which co-hosted the forum with the Secretariat of the UN Convention on Biological Diversity (CBD). Parties to the CBD are meeting in Kuala Lumpur.

"Carbon trading systems, the growing number of investments needed to protect nature's water shed services, the advent of labeling schemes for genetically modified food products, the emphasis of global environmental agreements on private sector involvement, and the rise of socially responsible investment portfolios are just a some of the signs that the private sector is at last being drawn into the critical biodiversity issue."

Sam Johnston, a UNU-IAS researcher, says the first industry-wide survey, conducted in 1984, identified $40 billion in assets in funds which feature a screen of some type for social responsibility. By 1995, the figure had risen to $639 billion and to $2.18 trillion in 2003. In the United States, such SRI portfolios grew by more than 240 percent from 1995 to 2003, 40% more than the 174 percent growth of the universe of assets under professional management.

Similar trends are evident in Europe. The number of SRI funds tripled in France from 2000 to 2002. Some 74 percent of Dutch pension funds expect to use social or environmental criteria in investment decisions in the near future. In addition, national legislation and initiatives are helping to increase the SRI share of the pension market. In July 2000, the U.K. Government changed the Pension Act of 1995, requiring trustees of occupational schemes to state the extent to which social, environmental, or ethical considerations are taken into account in the selection of investments. The Netherlands, Belgium, Switzerland, Sweden, Germany, and France have followed suit with similar enacted or proposed legislation.

SRI is quickly growing in Asia as well. Total SRI money under management in Asia is around $16 billion and expected to increase substantially in the next few years. Australia is the largest market in the Asian region with $14.3 billion invested in funds with SRI policies as of July 2002. After Australia, Japan is Asia's most developed and promising SRI market. Introduced in Japan only three years ago, over $1 billion is now invested in 11 SRI fund options.

The types of screens or criteria used in SRI has evolved over time. For example, divestment from South African companies is no longer an active screen since the end of apartheid. However, climate change and environmental management systems, human rights and genetically modified organisms (GMOs) are increasingly common social screens, with corporate governance expected to become a formal SRI screen in the near future. The concept of "sustainability" is another emerging screen type increasingly developed among fund companies and portfolio managers, due to the growing realization that the adoption of principles of sustainability can offer substantial long-term investor value. A nascent emerging issue is biodiversity.

Kerry ten Kate, Director of Investor Responsibility at Insight Investment and a Senior Visiting Fellow at UNU-IAS, says business represents a threat to biodiversity but also a potential source of help through innovation, funding and technology. And for business, biodiversity now has a growing and direct relationship to business risk and opportunity (and in turn to share price), profits, costs, public relations and reputation, brand, customer and employee retention, access to new markets and competitiveness.

Fund managers pursuing social responsibility use their entree to boardrooms as major shareholders to influence business practices, including such choices as product suppliers.

Particularly affected by growing public concern about biodiversity are the oil and gas, mining and minerals and utility industries.

An oil or gas reserve site typically operates for about 25 years and production at mature reserve sites is declining 5 to 10% annually. The economic life of a mine varies but mining and mineral companies today often plan for the useful life of a mine of some 20 years.

"Access to land to exploit new sites is thus vital to extractive and utility companies. Companies are acknowledging the business risk of the potential of public concern about biodiversity resulting in restrictions to land," says ten Kate.

"Growing resource scarcity, increasing development pressures on biodiversity and escalating public concern pose a strategic threat to extractive and utility industries. These companies may be denied access to resources in new sites in the medium and long term, with corresponding risks to revenues, unless they demonstrate high standards with respect to biodiversity conservation." Private sector spending arguably matters to the cause of biodiversity far more profoundly than the relatively small amount spent by governments or multilateral agencies, says ten Kate, defining corporate responsibility as meeting or exceeding the ethical, legal, commercial or public expectations in business practices.

"There is an enormous opportunity for business to contribute to the goals of the UN Convention on Biodiversity through better practices," she says. "Investors can be key allies of the CBD by using their money in ways that help influence business behavior."

She adds that their business interests should motivate individuals and institutions to include biodiversity considerations in investment decisions.

"Since biodiversity raises such important challenges for both sustainable development and long-term shareholder value, it is important for investors to take biodiversity into account in their evaluation of corporate practices."

Tools most needed by companies include the development of best practice standards and manuals, indicators of corporate performance, the availability of expertise and advice, and guidance to pension and other fund managers.

The February 11 forum was designed to convene representatives of some of the biggest fund managers to examine the potential for developing effective screens for GMOs and biodiversity, with a view to promoting the role of SRI to support the aims of the Convention.

Says Hans van Ginkel, UN Under Secretary-General and Rector of UNU: "Money talks. And we need to hear its full voice in the biodiversity crisis."

Source: Eurekalert & others

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