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.
Small Steps
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.
At Miller/Howard, which specializes in high-dividend stock strategies, about three-quarters of the $2.4 billion in assets under management is attributable to socially screened investment accounts or mutual funds. But even in accounts that don't fall into that category, the firm, which invests heavily in utilities and energy companies, engages in activities that have an influence on corporate environmental policy.
Recently, for example, it filed a shareholder resolution asking for greater disclosure of drilling practices by natural gas explorer Energen. That company and others in the industry use hydraulic fracturing to break up shale deposits. Also known as "fracking," the practice is controversial because it can contaminate groundwater in surrounding areas.
"We were concerned about litigation and reputational risk and didn't feel the company was disclosing enough about the processes it was using," says Steinhilber. Once the company revealed more information, Miller/Howard became comfortable that its practices did not appear to expose its shareholders to undue risk.
Long Road Ahead
Despite signs that mainstream managers are edging closer to more formalized and systematic integration of ESG criteria across all their accounts, experts say they still have a long way to go.
Up to this point, the UN PRI's organizers have focused more on gathering signatures than monitoring their ESG policies. Still, there are some measures in place to help gauge dedication to the principles and ensure that firms aren't just signing on to attract business.
Each year, signatories receive an e-mailed invitation to participate in a reporting and assessment survey, and the PRI Secretariat or a third-party partner clarifies responses through a one-hour telephone conversation. Signatories also receive an individual feedback report highlighting their ESG scores compared to their signatory peers.