Centre for Corporate Governance and Sustainability: The role of investors in building sustainable capital markets

Despite recent success in making responsible investing more attractive to investors, more support is required from governing bodies to continue the momentum. Though a prevalent attitude that sustainable investment is not profitable continues to exist, money managers are proven to respond to demand – meaning that pressure from clients to consider environmental, social and governance factors in investment strategies would be a huge step towards progress.

This was the message delivered by a panel of ESG (environmental, social and governance) experts at a special event, Building Sustainable Capital Markets: The Role of Investors, held at the Segal Graduate School on February 25.

The event was part of the annual BC Pension Summit, and was hosted by the SFU Centre for Corporate Governance and Sustainability, the United Nations-supported Principles for Responsible Investment, and SHARE (Shareholders Association for Research & Education).

Moderated by Beedie School of Business associate professor Stephanie Bertels, it featured guest panelists Vonda Brunsting, Director, Capital Stewardship Program, Service Employees International Union; Jennifer Coulson, Senior Manager, ESG Integration, bcIMC; Will Martindale, Head of Policy, UNPRI; and Shannon Rohan, Director of Responsible Investment, SHARE.

The event opened with a brief presentation from Beedie MSc Finance students about the integration of ESG factors into the management of the SFU graduate student investment portfolio, SIAS.

In 2014, SFU became only the second Canadian university to be a signatory of the United Nations Principles for Responsible Investment – a decision that directly impacts the learning experience of Beedie MSc Finance graduates. “Students working on SIAS are exposed to specialized skills that are in demand for employers right now,” said Vishal Bane, Chief Investment Officer at SIAS.

In 2015, SHARE was hired to write a discussion paper to identify some of the barriers and opportunities to integrating sustainability into capital markets. One of the key areas identified in the report, Integrating the Economy and the Environment: An Overview of Canadian Capital Markets, was that of institutional investors at the top of the chain.

“How do you support those bodies to develop policies that will account for environmental and governance situations?” said Rohan. “How do you get them to engage with companies more vigorously and more often, and get them to shift capital to more sustainable and productive activities?”

Describing the scale of the problem, Martindale noted that the World Bank’s annual commitment to sustainable trading is USD $50 billion per year – yet some USD $40 billion is traded on the New York Stock Exchange every single day.

“The conclusion of our fiduciary duty report (Fiduciary duty in the 21st century) is essentially the relationship that ensures investors manage money in the interest of their clients,” he said. “We believe that failing to include ESG is a failure of fiduciary duty, but also a failure of meeting the world’s sustainability objectives. We consider that to be the world’s 21^st century challenge.”

Brunsting added that a contributing factor to the reluctance to invest in sustainability was the current trend of using corporate money for share buybacks. In the last four years this practice has increased to a record USD two trillion of buybacks. Yet this does not consider the interests of long-term shareholders and workers. IBM, for example, has 55,000 fewer employees than it did in 2012, yet has exercised share buybacks during this period.

“If share buy backs are corporate cocaine, then the drug pushers are hedge funds,” said Brunsting. “It is a short-term way of boosting, especially if it’s based on earnings per share. One of the reasons companies claim they need to buy back their shares is because their stock price is undervalued – yet the companies doing this the most are also the ones in greatest decline.”

Commenting on the role of stock exchanges in sustainable investment, Coulson revealed that bcIMC has chosen to participate in the UN’s responsible stock exchange, which aims to persuade companies listed on stock exchanges to disclose more of their ESG data. There are encouraging signs in this space, with the World Federation of Exchanges starting a working group on sustainability to focus on this.

“We need that consistent ESG data to compare across peer groups, and we can’t do that without consistent reporting,” she said. “There is a lot of momentum around the sustainable stock exchange. The World Federation of Exchanges is putting it on the map for all the exchanges around the world to have a consistent approach, to get some kind of consistency to avoid a race to the bottom.”

For more information on the SFU Centre for Corporate Governance and Sustainability, visit beedie.sfu.ca/ccgs/