21. Transparency of Sustainable Investments

21. Transparency of Sustainable

Investments

Erol Bilecen CSR-Management, Raiffeisen Switzerland

Credibility is a crucial requirement for institutional investors. In the case of a pension fund, for example, every member ultimately wants to ensure that his or her pension assets are managed responsibly. Here, transparency helps to create credibility and thereby builds trust.

As far as purely financial aspects are concerned, credibility is already supported by regulation and auditing. When it comes to sustainability factors, however, the field is still wide open—even though there are initial European developments towards formalising these aspects, such as in France and the Netherlands as detailed next (see also chapter 5 on regulatory issues). The most effective way to promote transparency in relation to responsible investment is to document concrete actions that follow stated intentions.

Publication of the Sustainable Investment Policy

For institutional investors, it therefore makes sense to consider precisely how to guarantee transparency even in the initial stages of drafting a sustainable investment policy. The first and easiest step is to publish this investment policy—for example, on the website, in the annual report, or in an image or information brochure. As with every form of communication, the choice obviously depends on the target audience. In the case of a pension fund, the primary addressees are the fund beneficiaries, whereas in the case of a foundation the audience is mainly the public as well as existing and potential donors. Apart from being informed about the actual existence of such a policy, target groups may also be particularly interested in the reasons for its adoption. In the two examples provided above, this may be for financial reasons (e.g., risk mitigation) or ethical motivations, such as a foundation wanting to avoid a controversial investment clashing with its original purpose.

Transparency of the Portfolio Sustainability

Having defined the objective of the sustainable investment policy, more information on its actual implementation is naturally required. In this context, it is important that the information goes beyond the purely financial dimension (“Our sustainable investments have grown in value by x percent”)

and extends to the attainment of sustainability goals. This can be done on both a qualitative and quantitative level. One way of illustrating sustainability, for example, is to calculate a portfolio’s average sustainability rating in the form of a (capital-)weighted arithmetical mean of the sustainability ratings for the individual positions. This value can then be compared with the average sustainability rating of a conventional benchmark and commented upon. Because the format of these ratings is usually an ordinal figure, they provide a comparison of better or worse performance but do not allow for any quantitative statement on the scale of the difference (e.g., “The portfolio is y percent more sustainable than the benchmark.”).

In France, asset owners, fund managers, and insurance companies have been legally obliged since 2015 to report the extent to which they take ESG criteria into consideration in their investment processes, which greenhouse gas emissions are linked to the investments, and the ways in which they are helping to support the transition towards a “low carbon” economy. This reflects the growing trend for an increasing number of investors to determine the carbon footprint of their portfolios. They do so by specifying how many tonnes of carbon dioxide are linked to a specific investment sum. The idea behind this trend is simple: As regulatory and market-specific trends progressively oblige companies to reduce the relevant emissions, carbon-intensive investments should become more and more risky. In contrast to the average sustainability rating, an indication of the portfolio’s carbon intensity—especially compared with a benchmark—makes it possible to identify the portfolio’s quantitative “added ecological value” through a single figure: “Compared to the benchmark, this portfolio was associated with x percent less CO 2 emissions per CHF1,000.” This benefit is offset by a few serious drawbacks, however. The figures supplied by the providers in question are mainly based on estimates and moreover only refer to historical data—which is also the case for financial accounting data. Yet, the biggest drawback is that the obtained value only relates to one dimension: climate. Other environmental indicators, along with all the social sustainability criteria, are completely ignored. Finally, yet importantly, it is impossible to accurately determine whether a change in the carbon footprint is actually the result of an environmental or a financial decision.

One approach to resolve the last issue involves mixed sustainability indicators. Zürcher Kantonalbank (ZKB), for example, uses three separate indicators for investment funds covering environmental (CO 2 emissions per sale), social (reputation risk indicator), and corporate governance (a rating) factors. Here the advantage of ESG’s three dimensions is met with the difficulty of having to weight one dimension against the other two: When

comparing two companies, how much lower should CO 2 emissions be to offset a certain difference in reputation, for example?

Reporting on the Exercising of Voting Rights

Another area for reporting on the implementation of a sustainable investment policy is the entire topic of exercising of voting rights and, where appropriate, shareholder engagement. As far back as 2002, Swiss law has required pension funds to draft rules on the exercising of their shareholder rights. The Minder Initiative provided fresh impetus to this process, although not particularly popular as its implementation required a fair amount of extra work. For example, pension funds are now obligated to report how voting rights were concretely exercised in the area of compensation. A few investors, especially those from Nordic and Anglo-Saxon countries, go much further than that. They publish statistics on all votes cast and provide further information on the number of companies with whom they have had active dialogue outside the annual general meeting season and which issues were discussed.

These “Voting & Engagement Reports” are important building blocks for reinforcing the credibility of the corresponding sustainability policy. Regarding these reports, there are several points to consider. For example, the success of an engagement can depend on a certain degree of confidentiality. The report must adopt a carefully judged measure of transparency so as not to jeopardise the discussions that are ongoing in the background. When exercising voting rights, it is important that the underlying voting policy is also reflected in the published voting statistics. Especially because a voting & engagement policy is frequently used in relation to non-sustainable portfolio companies, both the successes and the failures (and their consequences) should be clearly addressed. Although this may well lead to discussions with other stakeholders, it is still the best way to foster credibility in the medium to long term.

Transparency Builds Trust

The following case study shows how transparency can help restore previously shaken trust. In December 2007, an investigative TV programme reported that Dutch pension funds held investments in some companies involved in cluster munition manufacturing. As virtually everyone in the Netherlands— as in Switzerland—is a pension fund beneficiary, there was an enormous public outcry; pressure mounted on the providers to act. Pension funds answered this criticism by committing themselves to sell all shares or bonds issued by the companies in question. Shortly thereafter, to prevent similar

cases from arising in the future, many pension funds improved their transparency by publishing their entire investment portfolio online for access by their beneficiaries.

Conclusion

Irrespective of the sustainable investment policy an institutional investor chooses to follow, it is generally recommended to communicate the respective initiatives, successes, and even failures to stakeholders in a transparent manner. This is the only way to complete the feedback loop and ensure the continuous improvement and legitimisation of the investment policy. Creating transparency requires a considerable amount of effort, but this effort should then be rewarded with credibility, legitimation, and reduced reputational risks.

Further Reading

• Nest Sammelstiftung. (2017). Treibhausgas Analyse Aktienportfolio

Nest. Available at: https://www.nest-info.ch/anlagen/nachhaltigkeit/ klima-und-co2-report/. • Norges Bank Investment Management. (2016). Responsible investment report. Available at: https://www.nbim.no/en/transparency/reports/2016/ responsible-investment-2016/. • Österreichische Vorsorgekasse. (2016). Umwelterklärung. Available at: http://www.vorsorgekasse.at/umwelterklaerung. • PGGM. (2016). Annual Responsible Investment Report. Available at: https://www.pggm.nl/english/what-we-do/Documents/PGGM

Annual-Responsible-Investment-report_2016.pdf. • PRI. (2016). Reporting and assessment. Available at: https://www.unpri. org/about/pri-teams/reporting-and-assessment.