Investors to fund firms: "No ESG, no money"

A group of major pension funds has written a no-ifs-and-buts letter to asset managers and companies warning that firms who fail to consider the impact of ESG risks are no longer “attractive” for investments.

The letter - signed by three big pensions funds including the California State Teachers’ Retirement System, Government Pension Investment Fund and USS Investment Management – comes amid growing investor awareness of the perils of ignoring long-term climate and ESG-related risks.

The
correspondence states pension funds no longer have the luxury of focussing purely on short-term returns as this
would be “ignoring potentially catastrophic systemic risks to our portfolios.”

Citing
data from Moody’s Analytics, the letter warns climate change alone has the
potential to destroy $69 trillion in global economic wealth through 2100.

“Companies
that seek to maximise corporate revenue without considering their impacts on
other stakeholders – including the environment, workers, and communities – put
their long-term growth at risk and are not attractive investment targets for
us.

“Similarly,
asset managers that only focus on short-term, explicitly financial measures,
and ignore longer-term sustainability-related risks and opportunities are not
attractive partners for us.”

While the pension funds recognise greater numbers of corporations are considering impacts to employees, society and the environment in their corporate strategy, and disclosing information in line with frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD), they believe there is still a long way to go.

“Entrenched
interests remain strong and resistance to change is fierce. Meaningful and
decision-useful ESG-related disclosure and analysis remains the exception
rather than the rule,” the signatories wrote.

“And
in many regions, regulations that reflect a more long-term investment paradigm
have been slow to evolve. For our part, we are committed to those companies
that create value for us over the long-term.”

Stern
warning

These
major pension funds said they are now hesitant to work with fund groups who fail
to integrate ESG factors throughout their investment process, do not vote
according to the mandate to which they have pledged, and are not transparent about
their level of corporate engagement.

“Sceptics that continue to
question the growing role of sustainability within the global investment
community should realise that they are quickly becoming the minority.

“With a large majority of
research in a meta-analysis of over 2,200 studies showing a positive
relationship between ESG investment and returns – and around 90% showing at
least a non-negative effect – they should also be aware that the evidence is
not on their side,” they added.

The letter explained that asset
managers who commit to sustainable goals are not injecting politics into
business, or “virtue signalling” – but are fulfilling their duty to investors.

“We therefore urge both our partners and the companies in which we invest to rethink their strategy and enhance their disclosures, using frameworks such as the TCFD, regarding their interactions with stakeholders, society, and the environment so that we can collaborate in generating and enhancing long term value,” the letter concludes.