News | ESG
Investors call on EPA to “sharpen your pencils” following Dakota pipeline scandal
A group of 50 investors and organisations with a combined $2.9trn (£2.3trn) of assets under management has called on the Equator Principles Association (EPA) to do more to protect indigenous people. The move comes following the Dakota Pipeline controversy. The construction of the oil pipeline in North America attracted protests from an indigenous community for threatening their access to clean water and crossing ancient burial grounds. It later emerged that 13 of the 17 banks funding the project were signatories of the Equator Principles, a framework for managing envi- ronmental and social risk in project finance. The signatories of the call for action are predominantly North American and Canadian investors, which include Boston Common Asset Management, the California Public Employees’ Retirement System and the New York State Com- mon Retirement Fund. Campaigners argue that the Equator Principles currently fall short of protect- ing the rights of indigenous people.
Poor ESG performers carry higher credit risk – study
Companies with a poor ESG track record are more likely to experience higher levels of volatility and wider credit spreads, according to the University of Pennsylvania. The study by Witold Henitsz and James McGlinch pub- lished in the Journal of Applied Corporate Finance is based on a sample of 342 companies over eight years and draws a link between ESG performance, material credit events and credit risk. Examples include the VW emissions scandal and Bumadinho dam owner Vale. Researchers found that poor ESG performance was not only associated with higher credit risk but that it had not initially been priced in by management. At the same time, researchers found evidence of companies with a poor ESG track record trading at higher credit yield spreads.
The findings could be relevant for investors holding corporate debt issued by oil and gas firms. Since 2018, such companies have approved some $50bn (£41bn) of investment in major projects that have undermined the Paris climate agreement, research by the Carbon Tracker Initiative said.
Institutional backing for ESG still in early stages
Barclays, one of five UK signatories of the Equator Principles, is one of the investors in the pipeline. The other four British members, who are not con- nected to the project, are HSBC, Lloyds Banking, Standard Chartered, Green Investment Group and UK Export Finance.
The protestors propose that the current distinction between designated and non-designated countries should be scrapped. Designated countries are classed as high-income OECD countries, while non-designated countries are emerging economies.
They say that the existing principles assume that designated countries already observe high levels of environmental protection standards. A look at the Dakota Pipeline shows that this is not the case. They are responding to a public review of the Equator Principles initiated by the Equator Principles Association (EPA). They also demand more robust con- sultation and grievance processes.
Beth Richtman, managing investment director at California Public Employees’ Retirement System, warns that by distinguishing between designated and non-designated countries, major human rights issues remain unchallenged. “We encourage the Equator Principles Association (EPA) to sharpen their pencils and consider the recommendations of the investors on human rights,” she said.
Despite growing regulatory pressure, the majority of institutional investors globally have not embedded ESG criteria fully into their investment process. More than half (52%) of institutional investors qualify as early stage ESG adopters, defined as those who focus on a negative and positive screenings with relatively low levels of engagement, according to a CoreData Research survey of 800 investors.
Only about a third of respondents qualify as ESG embedders, meaning those who include engagement, sustainability-themed investing and impact investing into their approach, CoreData Research shows. European investors tend to have the highest levels of ESG investment, scoring 5.1 on a scale that ranks adop- ters up to 10. North America scores the lowest at 3.6. In the UK, pension fund trustees face increased pres- sure from the government to enhance their ESG reporting standards. In line with the revised EU share- holder rights directive, pension scheme trustees will have to publicise their policy on financially material ESG considerations and stewardship in October.
Issue 86 | September 2019 | portfolio institutional | 25
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