Institutional investors will put 60 billion into Danish Infrastructure

The Öresund Bridge from underneath

The Öresund Bridge from underneath (Photo credit: Wikipedia)

It is quite amazing to see and hear what Institutional investors are communicating at the moment. For a long time it was their job to create more wealth for the people who had trusted their hard earned money into a few very well of funds. They invested freely in all kinds of projects and had portfolios that were very diversified (and some would say to diversified).

The first came the raise of the consumer activist who forced these huge investors to put in ethical screens that ensured that there was some form of consistency between the individual wishes and the investment targets. These pension funds have now taken a further step in the direction of creating a more sustainable investment platform by looking into projects that benefit the very society and people own them.

The financial and economic crisis means that public construction projects are on a diet, but now there are signs that there may be a tremendous boost on the way to the Danish infrastructure. A telephone survey done by a independent think tank, shows that the country’s ten largest pension and the state owned, ATP, are willing to invest nearly 60 billion kroner in the Danish infrastructure such as a harbour tunnel in Copenhagen, sewers or a large bridge between some of the main island of the country. According to calculations this will create 7,200 new Danish jobs annually over a period of 10 years when billions are invested in public works projects.

This means that there is cash then the government just need to provide the projects and vision needed to make it a reality.

Back to the Why of CSR – Its the story that matters

From time to time it can be difficult to establish what it is all good for why is it that we are so focused on the business case, brand value, if we are listed on the FTSE4Good or not etc. We tend to be preoccupied with the technicalities or the How of CSR and not as much on the Why. The Why tend to be taken for granted because there is so much pressure on showing that we can be transparent, accountable or that we have a effective plan for our work. But when we are forced to think about and explain why corporations are engaging actively in CSR and goes beyond the mere management of stakeholders we come back to the basics of telling the story of doing good.

I have never met manager or business leaders who have not taken a stand on their business impact on the society they are part of. Some would claim that paying tax would be sufficient others have a broader perspective on the thinking, but common for them all is that they have taken a stand and that they have a personal story to tell that explain that standpoint. They like all of us have focused on the Why while we might disagree or agree on the standpoint they do have a personal story to tell that have shaped their opinion and convinced them why their standpoint is the best solution to business role in society.

Now I could leap into a greater discussion on the different discourses of CSR explaining the pros and cons of Friedman or Porter and Kramers standpoints or maybe explain why Ruggie is such a proponent of political CR. But I will refrain from this discussion and just conclude that we have different perspective on the role of business and even though one manager might be reluctant and sceptical towards CSR in general, most large business are in some way engaged in the subject anyway. So even though management might be pretending not to be religious about CSR when they fold their hands they are still praying.

So back to the first question and the Why of CSR. In my opinion it is all about the story about the journey the corporation describes and the willingness to share this with the rest of the world. Basically explaining to the world about your individual Why. At the Global Compact website there are hundreds of stories about the Why of CSR some from companies that have integrated CSR in all parts and corners of their business others have only focused on a very narrow part of the CSR spectrum.

One of the places were one can find stories about the corporate CSR journey is in the Global Compact (GC) case story archive. The story being told are of cause about the ten focus areas of the GC and how different organisations work with each of these elements individually. The idea is that best practice can be shared among the participants and beyond. But the story behind the story is about how some stories are told better or have a greater appeal than others. For example have most of the storytellers a real and definite focus on environmental issues and especially their carbon footprint, but almost no one have a story to tell about their anti-corruption work. This differences in corporate attention gives a real picture of the Why organisation engage in CSR activities.

The same picture is evident when one examines the Communication on Progress, which is a precondition for continued membership of the GC. Corporation just seems to focus more on the areas were their most salient stakeholders have their main attention. In research done by Ralf Barkemeyer on CSR in the context of international development he found that the main focus was on environmental issues followed Human rights and Labour rights and last to come was anti-corruption. Another interesting thing that came out of the survey was that a very large proportion of the issues addressed by EU companies were directed at the home country and not as one might think at the countries were the corporation was most active.

This tells us that the Why of CSR should be found not in the effort top do well by doing good but rather as a way for companies to confront some of the issues that their most salient stakeholders have with the company. These can be customers who demand specific actions, but more likely it is home country media who highlight specific issues, which have the possibility of threatening to companies’ ability to operate efficiently. In resent years the majority of this pressure have been channelled through institutional investors who have a increased stake in ethical investments. While individual shareholders might not be influenced by corporate decisions the case is not the same for larger investors such as pension funds or large unions.  The reason why we make this distinction is based on some of the characteristics of these two investor groups.

Individual investors tend not to know their investments portfolio ethical performance. While they might know a great deal about the economic performance they have little or no knowledge or for that matter interest in the CSR work that the company is involved in. The reason is that most investors (excluding shareholder activists) have a very limited view on corporate performance stretching for a short period of time where they expect their stock to perform. This strategy encourages companies to focus on indicators, which they can influence with relative ease compared with larger problems one can find with the area of ethics and culture.

Institutional investors have a clear interest in long-term engagement meaning more than five years. First of all because institutional investors are normally able to invest relative large sums of money in a company and by that have a opportunity to influence its strategic development. Second, as a institutional investor you are under constant scrutiny by the press and other media on how you put together your investment portfolio. There have been several instances were investors have been forced first by the press and later one by their own stakeholders to change their investment strategy. Just take the Norwegian oil-fund, which I have blogged about some months ago and their engagement in Burma.

The lesson is that the Why of CSR is about the tory one tells or let other tell about the organisation. That organisations ethical performance is much more normative that we would like to think and that if we like stories about Ecology or Human rights there will also build a pressure for corporation to act within these areas. And that if we are enough that think the same way about a issue we will change corporate behaviour even though it is against the monetary logic of the moment.

Who is best in class

The Down Jones sustainability index have just issued a press release were they state that the DJSI is now including 20% of all the companies in Down Jones (out of 2500).  In the release DJ states that it will use 513 components in their screening process and in addition they will use 459 components that exclude companies involved in tobacco, alcohol, gambling, armament and firearms, and adult entertainment.

One of the reasons for the change and expansion of the index is that institutional investors have been asking for a more diverse “investment universe”. As Rodrigo Amandi CEO from SAM Indexes (the screening company) states “SAM Indexes has repeatedly received inquiries for a more extensive investment universe from institutional investors managing sustainability portfolios. It is inspiring to see the increasing importance investors attribute to sustainability criteria and we are looking forward to providing this benchmarking tool, while continually expanding our unique Sustainability Investing platform.”  

This made me wonder on what ground the index was expanded. One of the major issues in SRI is the exposure to risk. Because your choice of portfolio is relative small compared to traditional investors there you have fewer options to diversify your investments. If however the index from where you can choose companies from suddenly expands your risk will subsequently fall as you have more options to pick from. The DJSI is one of the criteria’s that many investors use to legitimize their choice of portfolios and companies use the DJSI logo on their homepage when they get included. So there are a lot at stake when the index is included both for all parties involved.

I think this show some of the complexity of SRI and how to handle the fundamental issue of “being good while doing well”. A social conscious and responsible investor wants to invest in companies that make the world better off in the long-term. This would naturally mean that a lot of companies would have to be excluded. In the DJSI we find companies like Chevron (Oil) and until recently was also BP included. Both companies would not be associated with long-term sustainability. Also companies like Vodafone and General Electric are part of the top holders of the index both associated with conflict minerals which are used in mobile phones.

I will not argue for or against specific companies being part of the DJSI or another index for that matter but I think it highlights some of the central issues that we as investors face. To what extend does a given index support our own view of what a sustainable company constitutes? Why exclude Alcohol and include Oil? I would not be able to tell you which one make out the biggest danger to our common health. Why exclude firearms and include mining companies and electronic manufacturers that rely on the cheap raw materials which the arms are helping produce.

Of cause one has to draw a line somewhere and it might as well be where the DJSI puts it as anywhere else but It makes one wonder what a true sustainable business really is.

SRI Investments strategies according to Oxfarm

Recently Oxfarm issued a report on Responsible Investments a two year project with the participation of a wide range of portfolio companies, institutional investors etc. They have done a thorough job on analyzing and investigating the impact that responsible investments have, or should have on poverty reduction. There is no doubt that intuitional investors would, if they pooled their forces, have a significant impact on poverty reduction worldwide. As Oxfarm states they are a Rights based organization, meaning that they believe that investors should take responsible for their investments impact in relation to Social, Environmental issues. This of cause also means that they believe that organizations have a obligation to act and respond responsible towards their stakeholders.    

I have quoted the issues that Oxfarm have identified in relation to institutional investors for you to see.      

• The lack of oversight by asset owners of the manner in which their investment managers take account of environmental, social and governance issues – and how they impact on poverty and sustainable development outcomes in their investment practices;

• Short-termism, in particular the striking disconnect between the very short-term horizons of most institutional investors and the much longer timeframes required for the realization of poverty reduction and development goals; and

• The general lack of transparency within the investment community, most notably in the context of this project, the lack of information from the majority of investors on their approaches to responsible investment.

I think that the Oxfam report highlight several issues that investors, civil society and governments are fazing in these difficult times.

As governments have fewer funds to allocate to development projects in general NGO are increasingly looking for other actors to take over some of the roles that they used to have. Oxfarm wants Institutional investors to take a greater role in the reduction of poverty but they want to have governmental oversight of the allocation. I see this as a symptom of the crisis in the development world. In Scandinavia alone we have seen a dramatic decrease in development projects over the last ten years. More and more projects are being cancelled or have their activities significantly decreased. As a example is Nicaragua which used to be one of the major contributors of both Danish and Swedish aid in different forms now are the activities close to zero.

I think that Governments and civil society should think twice before they ask the market to help them out. Governmental oversight might be a very good solution on paper but in reality it would still be under the influence of the market. Oxfarm might believe that institutional investors constitute an endless money stream that can be used for the common good. But in the end of the day pension funds will be responsible to the people who have put their hard earned pension money into their pot in the hope that there would be money for their retirement. If the intuitional investor can’t make that promise come true they will cease to exist no matter how many poor they have saved along the way.

Oxfarm wants governments to regulate investors’ ability to invest on short term basis. In the market for investments are institutional investors some of the most long term strategist around. They usually invest in companies that they believe will be around in ten or twenty years because they will not need the money anytime soon. People save for their pensions from around the time that they leave school but they do not need the money before they are well into their sixties. This gives a lot of time for the institutional investor to think long-term. However…

  1. This will favor companies that are already established on the market which are mainly big companies.
  2. It makes it hard for small companies to raise funds if they do not have an already established track record.
  3. It means that companies who have large institutional investors as their major owners will tend to be more conservative.  

Institutional investors are among the wealthiest organizations in the world. They can virtually make and break companies with their recommendations and investment strategies. Companies who can attract intuitional investors are usually never out of cash as long as the company is well governed. But they leave small and middle size companies alone, who in turn, will lack capital if the “short-term” investor is not there to take a risk.

Oxfarm claim that companies taking a CR approach will be more profitable in the long run. I do not know what the long run means in this context, but there is no evidence that companies who have a CR focus are more profitable or make a sounder investment. As I have blogged about before there are actually more risk associated with a CR approach to investments. There are, however, other good and legitimate reasons for investing socially responsible but more money is, at the moment, not one of them.

I would love to see more transparency from institutional investors and for them to open their portfolios for scrutinizing. I’m sure that we will find that ethical screening can mean a great deal of different things. One of the greatest obstacles is that there is no consistent way for organization to report on their portfolios so there is no way for outsiders to really get a glimpse into the “boiler room” so to speak. One of the reasons is that institutional investors rarely micro manage their own funds. They leave it to portfolio managers who will do investments based on the guidelines issued by the institutional investor. Most of the time one manager will have between 1000 and 2000 companies under his/her care. The manager might be specialized so that they know and are experts in a specific region or screening process. One Institutional investor might have several portfolio managers from different companies working for them and basically trust them to micro manage their fund based on a specific risk profile, screening products and estimate on return. Creasing transparency in such a environment is next to impossible as there is competition between different portfolio companies and they invest a great deal of their own funds in producing in-depth analysis which will give them a competitive advantage.         

The question is Oxfarm wrong in their analysis and recommendations? No, not really. It just comes down to that they are “a Rights based organisation” and they will of cause see the world based on how their own perceptions nothing more and nothing less. If NGO’s and CSO’s want to change the business world they will need to know how the market functions based on knowledge and not belief, it is as simple as that. You can find the full report following this link.