Michael Cantara isn't the kind of guy you'd find at a conference for socially responsible investment managers. In fact, the global institutional portfolio manager for Massachusetts Financial Services is quick to point out that his firm has no desire to become the next environmental, social and governance powerhouse.
"We're not trying to make ESG part of our marketing approach," he states flatly. "But it is something we've certainly built into our investment process across the firm."
While mutual funds and investment advisors who specialize in socially responsible investing may wish to capitalize on the niche, mainstream managers who integrate ESG into their investment processes usually prefer to keep things much quieter. They typically don't advertise the practice heavily or make it a big part of their marketing effort. And they may not even call evaluating corporate, social or environmental practices anything other than good old-fashioned investment analysis.
"We're seeing a lot of interest from mainstream managers who want to integrate ESG into wrap accounts for some of their clients," says Luan Steinhilber, ESG analyst at Miller/Howard in Woodstock, N.Y. "But they also make it clear that as a firm they are not interested in expanding their reputation as politically correct, socially responsible investors."
Nonetheless, the growing number of signatories to the United Nations' Principles for Responsible Investment (UN PRI) makes it clear that more of them are interested in getting the word out that they are at least in the initial stages of integrating ESG into their investment process.
Launched in 2006, the landmark document outlines six major principles for responsible investment for institutional investors. They include incorporating ESG issues into investment analysis and decision-making, seeking disclosure on such issues from companies they invest in and taking steps to effectively enhance implementation of the principles.
The number of signatories has grown from 56 five years ago to nearly 900 today. They run the gamut from boutique SRI investment managers to mainstream firms such as Massachusetts Financial Services, BlackRock, TIAA-CREF, T. Rowe Price, State Street Global Advisors and TD Asset Management. Taken together, they represent over $25 trillion in assets under management.
Christopher Davis, director of investor programs at SRI research firm Ceres, says mainstream managers have been motivated to sign on to the UN PRI for a couple of reasons. One of them is a growing recognition that environmental, social and governance criteria are important determinants of long-term stock performance and corporate sustainability.
"The more cynical view is that for mainstream asset managers, particularly in Europe, being viewed as a credible ESG firm has become critical in getting investment management mandates," he says. "Some large European pension funds won't even consider hiring an investment management firm unless it's a UN PRI signatory."
While most pension funds and other institutional investors in the U.S. don't routinely screen their investment managers for ESG criteria, recent events could prod them in that direction. In May, the $153 billion California State Teachers' Retirement System (CalSTRS) announced that all performance-related discussions with external investment managers would include a review of ESG criteria in their investment strategies. Around the same time, the California Public Employees' Retirement System (CalPERS)-at $236 billion, the nation's largest pension fund-announced it would be fully integrating ESG factors into all of its investment decisions.
Davis says the CalSTRS and CalPERS announcements have increased awareness of ESG criteria among pension funds and other institutional investors who hire asset managers. He also sees a number of mainstream firms including "green" investments in their portfolios, such as bonds used to fund clean energy projects. "They're not even a full percent of anyone's portfolio, but it's a start," he says.
Other signs point to increased awareness of ESG issues. In a 2008 study by Thomson Reuters' Corporate Advisory Services, 84% of institutional investors said they incorporated ESG criteria into the decision-making process, and another 16% cited it as a key factor. In 2009, Bloomberg launched a service that provides publicly available ESG data on 3,000 companies for clients hooked up to its 250,000 data terminals.
For many mainstream investment managers, the integration of ESG into the investment process has been more of a series of small steps rather than giant leaps. At MFS, says Cantara, governance issues such as excessive executive compensation have long been on the firm's proxy voting radar screen. More recently, environmental and social issues have received attention in both proxy voting and stock analysis.
"For us, a company's attention to ESG issues is about sustainable growth," he says. "Our analysts look at balance sheets and income statements. But they also consider issues related to the environment or labor relations because they have a financial impact. For us, ESG doesn't drive decisions. But it does highlight what we need to pay attention to."
Cantara says his firm has avoided investing in certain companies because of the potential impact environmental liabilities could have on their bottom line, though he prefers not to name names. With utilities, for example, analysts might look at which ones use clean or renewable energy sources to produce electricity, since those would be less susceptible to legal or environmental challenges. And earlier this year, the firm subscribed to MSCI's ESG Research, a service that provides ESG ratings for many of the companies in MFS' investment universe.