Aviva vs. Henderson, two very different approaches when it comes to slashing SRI costs

Following Aviva's recent decision (see announcement), made public earlier in August, the UK investor keeps its SRI fund offering, though outsourcing their management to Alliance Trust. This strategy contrasts with the earlier decision of Henderson to eliminate their SRI research capabilities altogether, handing over the management of their SRI investments to regular portfolio managers, and relying on a third-party ESG data provider for sustainability insights.

Aviva’s approach offers a great advantage while securing the vital cost cutting goals. With their strategy, Aviva does not compromise the quality of their SRI offering, as these funds will continue to be handled by the capable hands of the team led by Peter Michaelis, though he will be able to share his expertise with his new colleagues at Alliance Trust Investments.

Instead, Henderson SRI cost cutting could come at the expense of the quality of the firm’s SRI expertise. While Eiris provides undoubtedly some of the best SRI research available, many would think that this input alone will struggle to compete with the expertise and resources offered by an established SRI management team.  Henderson’s former SRI team, now employed at WHEB Asset Management, could be missed quite soon if retail investor started to favor those firms still committing themselves to the highest SRI research capabilities.

Aviva Sustainable Future Managed Fund, the £317m AuM, Henderson’s largest SRI fund, is being co-managed by Coling Purdle and Peter Michaelis. Their strategy to invest in Inditex, a sustainability-committed Spanish fashion retailer, and earlier on in GlaxoSmithKline, once its US liabilities have been put behind, while divesting from stocks such as HSBC, seem to be paying off. According to Lipper Hindsight, during the first part of 2012, the fund outperformed the sector average achieving a 5% performance.

Sadly though, as Aviva and Henderson recent decisions demonstrate, Sustainable Investing is one of the units most at risk when it comes to cutting costs. It would appear that SRI investments are not the money maker that some might have expected to be. However, any long term strategy will have to prepare mainstream investors too for a decent degree of ESG integration, as signatories of the UN PRI….do they plan to achieve that without an in-house ESG team? Here we go again, short-termism being imposed to long-term decision making!

SRI gloom… how do we move on from here?

 

My key takeaway points from the recently published Extel/UKSIF 2012 SRI State of the Nation study (Download the report from this link)

Is SRI another victim of the general markets gloom ...or the realization of the very slow progress on sustainability in equity investments?

The conclusions of the comprehensive Extel/UKSIF 2012 SRI State of the Nation study, published on Tuesday 10th July 2012, lead us to believe that there is a prevalent feeling of gloom among the SRI community. This could be best described as having hit a wall, the general acknowledgement that with the current framework and tools SRI investing and sustainability in general cannot progress any further. Investors, Asset Owners, Corporate and Governments recognize that they need to move on together in order to make sustainability mainstream. According to this study, the key challenges ahead are:

1. Lack of leadership to make CSR & ESG investing mainstream. Investors, Corporates and Governments are waiting to see others be the first to take the next steps. Honestly, who of these actors is really taking Climate change seriously?

SRI Investing at a crossroads

2. ESG data overload. At the same time, not all relevant ESG data is collected and disclosed appropriately. Non-standardized data still poses a technology challenge.

3. Well-known intrinsic difficulty in integrating non-financial data into investment decision models. Need to create a working framework were “low-frequency & high-impact” risks and long term financial metrics are effectively integrated.

4. Lack of cooperation among sustainability stakeholders. Corporates find understanding the key drivers of SRI investments difficult as investors feedback is scarce to say the least. Also engaging with SRI investors in order to improve their CSR policies is far from becoming a general practice. Asset Managers feel there is a lack of real commitment on the part of Asset Owners to ESG investing, as opposed to the widely perceived box-ticking exercise. Government initiatives and the UNPRI are not implementing the necessary steps to ensure ESG integration quickly enough.

5. Sadly, short-term thinking is still prevalent among Corporates, Investors and democratic governments. This in itself clashes with the whole SRI investing ethos which requires long-term thought and investment horizon.

So, how do we move on from here?

The Natural Capital Declaration, a review.

The Natural Capital Declaration (referred to from now on as NCD), a Rio+20 framework towards a greener economy, once more brings us back to the old fashioned concept of monetising "intangible assets" seeking to better price them and therefore allocate resources more efficiently, in theory of course.

It is important to note that the NCD model does not question the social values underlying the current capitalist model, i.e. maximisation of profit, it merely recognises the intrinsic scarcity of natural resources by reflecting this in terms of higher costs for businesses. The proposal highlights one of the great economic paradoxes of our capitalist model by which essential natural resources are being used at rock-bottom prices for the production of goods and services. Essentially, the current capitalist approach prioritizes short-term business profits as opposed to a long term natural equilibrium of our planet which should support a sustainable future. In this fashion, the model invites signatories to better reflect the actual costs of what is being taken from the natural environment,

referred to by the NCD as an "asset", in a way that "the private sector, governments, all of us, must increasingly understand and account for our use of Natural Capital".

There is certain "deja-vu" between this approach and the current, and highly controversial, CO2 trading mechanism, which hasn't really helped resolving the problem of carbon emissions and climate change. It has merely landed vasts amounts of money in the hands of traders and multinationals, seeking as usual profit maximization.

Interestingly, the NCD initiative asks the financial sector and governments to lead the transition to the Natural Capital model. Right now, let's face it, both players are focused in the survival of the capitalist model. The financial sector, in the brink of collapse, still in need of major support lines from governments, will not fully engage in this proposal, which, if anything, would pose a new threat to the beleaguered system they are trying to keep alive. Governments, on the other hand, are scared of losing business activity by imposing "non-business friendly" regulations and taxation regimes even with such a noble purpose as protecting the environment.

More importantly in my view, this well-intended yet timid initiative is missing the opportunity to tackle the real issue behind the current unsustainable use of our natural resources. This is undoubtedly our deficient set of values as a society. The most important task in order to turn things around is to promote a change of these values in our society while fostering the transition of our economy to a new economic model. But this change of economic paradigm will only be possible when there is a sufficient number of people, a critical mass, is able to get rid of our fears, short-termism, greed and egotistic blindness, and generally speaking, irresponsible behaviour currently common place among citizens, businesses and governments. We need to place the well being of our environmental and human beings, collectively, right at the top of our values. We know by now that at the current pace we are destroying our planet, our way of life is just unsustainable. I view this Natural Capital Declaration as an evolved, green-washed, version of the set of values and therefore, not fit for purpose.

It merely assigns a cost (how?) to the often seen as "free" natural resources in the hope that this will change our habits and overall environmental impact. The current practice of taking as much as we can of the natural resources while paying as little as possible for it, regardless of its impact in the ecosystem, has to change radically. 

I propose a move to globally promote a new set of values and the adoption of a Zero Environmental Impact policy, where every human activity has to be neutral to the environment in the long term. This means that if a given activity detracts non renewable resources from the environmental, this loss has to be compensated with a gain elsewhere. Regulation would facilitate that this is done proactively by individuals and organisations, however having a global legal framework including a taxation system

would ensure that this is actually the case. Regulation would ensure that our activities no longer detract limited resources irresponsibly. 

Ensuring a long term sustainable way of life compatible with the well-being of future generations on this planet is a change we cannot afford to delay. The Natural Capital Declaration simply is doing just too little, too late.

Eurosif/Ethix Media Report

Interesting paper in which Ethix summarizes the ESG risks of media. This is a very tricky sector for long term sustainable investors, recent high-profile scandals highlight the crucial importance of ensuring a code of ethics in the sector is enforced. Perhaps, if I may say so, the paper walks too lightly over major megatrends affecting a large part of the sector's long term prospects: general loss of credibility by mainstream news media (often perceived as biased, prone to manipulation or even storage of private data issues), segmentation of audiences leading to lower penetration & margins, commoditization of news & entertainment and digital breakthroughs allowing media users to become ad-hoc journalists & commentators. An ESG analysis of the media sector, such as the framework provided here by Eurosif and Ethix, precisely emphasises its tremendous downside risks. But there are clearly winners, notably the new category of social media...Facebook, Twitter, blogs, Linkedin...the paradox is that in my opinion high standards of ethics will become even harder to implement through the new media than it already has been in traditional media.