Five Questions to Ask About ESG

Coverage of the 2014 Risk Management Conference

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pollutionWhat are the current and future trends in socially responsible investing (SRI), and how do they affect pension investors?

SRI originally developed as a response to the slave trade, explained Cindy Rose, head of research and responsible investing, global equity team, with Aberdeen Asset Management. It then evolved into negative screening, where a certain group of investors excludes areas or activities that it doesn’t want to be involved with, such as alcohol, gambling or weapons.

The next evolution of SRI was positive screening, where investors create a list of positive criteria for investing using a top-down approach. Some examples of positive screens include human rights policies, community involvement or environmental practices.

More recently, the desire to get away from a prescriptive list has led to the development of thematic funds—for example, wind-farm funds, solar energy, environmentally friendly funds, funds focusing on CO2 emissions or labour-friendly funds. Rose identified climate change risk as one to watch going forward.

The UNPRI has set a framework for investment firms with respect to environmental, social and governance (ESG) factors and has helped to make SRI more mainstream, said Rose; however, its requirements aren’t extensive.

That means the investment manager has an important role to play in understanding client needs and engaging with individual companies on the client’s behalf. “You have to understand what the client is looking for; you have to understand what kind of risk they’re looking to take,” said Rose. “You’re pulling back that outer veneer to find out more about the companies themselves.”

When investigating a company from an ESG perspective, here are five key questions to ask.

  1. What is the company’s ESG structure?
  2. Who is responsible for ESG oversight?
  3. What overall business policies are in place?
  4. Is risk mitigation aligned with executive pay?
  5. Has the company done a risk assessment of its business?

“When I first started it was very much a box-ticking exercise,” Rose explained. “It has gone the entire gamut now.”

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