InvestmentsJan 19 2015

“Companies that consider ESG are better bets”

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Fiona Reynolds left her home in Melbourne, Australia, and uprooted to London roughly two years ago to take on the role of managing director at Principles for Responsible Investment (PRI).

The organisation is an investor initiative in partnership with the United Nations (UN) and has six principles of investing that signatories must implement as part of the PRI’s aim to establish a more sustainable global financial system.

Ms Reynolds explains: “In essence the principles are all about the fact that you will incorporate environmental, social and governance (ESG) factors into your investment decision-making and that you’ll promote the principles as well.”

She is the first to acknowledge there is often some confusion between socially responsible investment (SRI) funds and responsible investment.

“For us, responsible investment is all about mainstream investment,” she clarifies. “It’s about people incorporating ESG risks. But it’s not about saying they’re more important or elevating them above other risks. Your key role as an investor is to consider risk versus return and when people are looking at risk, that there is more to think about than just the balance sheet.”

She continues: “We know that companies that are well governed, have good boards, and have the right policies and practices, are better companies. They perform better; they outperform other companies. So we know companies that do consider ESG risks are going to be better bets for people over the long term.”

Prior to joining PRI, Ms Reynolds had established a career in the Australian pensions, or superannuation, industry. It was the impact of the global financial crisis on personal pensions that stoked her interest in responsible investing, though.

At the Australian Institute of Superannuation Trustees, where she spent six years, Ms Reynolds had been involved in lobbying the government to increase compulsory pension contributions from 9 per cent to 15 per cent and found some success, with contributions eventually raised to 12 per cent. But she had also witnessed many Australians, as elsewhere in the world, lose a significant proportion of their retirement pot when the financial crisis struck.

She admits: “It is okay if you’re a 20 year old or a 30 year old if you have some losses in your pension fund because it will go up and down, and you’re in it for the long term.”

But it was different for “those people who were in their 50s”.

“They had saved for their retirement and they had thought they were going to be set up for retirement, [and] then found in some cases 30 per cent of their balances were gone in one fell swoop.”

“I then thought,” she adds, “why am I spending all of this time trying to get more money put into the system when there are obviously fundamental problems?”

For Ms Reynolds, it was clear the markets were not secure and that they were not considering risk in a holistic way.

She emphasises that the PRI works with a wide range of stakeholders and with two UN partners in particular: the UN Global Compact and the UN Environment Programme Finance Initiative.

“One of the principles is that you need to report about what you’re doing to integrate ESG and the principles into your investments because it’s pretty easy to sign onto a set of principles – anyone can do that,” she admits. “So we ask signatories on an annual basis to report to us about their progress and it’s also mandatory for them to disclose. It’s not just that they report to us, it’s also on public record.”

So has Ms Reynolds seen any progress among those companies that have adopted these principles in the past 12 months?

“In general, we would say that there’s progress, but it’s slow,” she replies. “And there’s a lot more that needs to be done if we’re going to see responsible investment become a mainstream issue, which is one of our main aims.”

So far, her career has taken her all over the world, but a recent visit to the White House stands out as one of Ms Reynolds’ highlights. The PRI recently launched “an engagement programme” on water in the agricultural supply chain, which attracted the attention of the US president.

“We got to launch this initiative at the White House because the US president has a climate initiative and [the administration is] particularly interested in food security.”

Neither a career in the pensions industry nor in investment beckoned for Ms Reynolds when she started her working life, though. She just “fell into” her career.

Her first job was in the legal profession until she stumbled upon a role in the superannuation industry in Australia. “I knew very little about superannuation,” she recalls. “I think what I knew about it you could write on the back of a postage stamp.”

Compulsory superannuation was introduced in the country in 1992, which Ms Reynolds recognised at the time as “a good thing”.

She adds: “I also felt very strongly about the point that in Australia, as in many countries, if you have a really great senior job, you got great pension benefits but the rest of the working community had terrible pension benefits, if any at all.

“So I was therefore very interested in the rights of average workers being able to retire with dignity. That was something I was very struck by.”

Unsurprisingly, Ms Reynolds believes that were she to have her time again she would have gone into politics. But with a three-year strategy underway at the PRI, she has little time to think of what might have been.

She explains: “The whole theme of our plan is really about moving from awareness to impact.”

As part of that, the organisation will pay closer attention to the progress being made by signatories and how that feeds into the PRI’s credibility, as well as making better use of the data collected during the reporting process.

“We are also going to focus on the North American market over the next couple of years,” she notes. “While the PRI has just over 200 signatories in the US, compared to the size of the US market, it’s quite small. It’s an area where we have had more problems than in Europe.

“We [also] have a very active signatory base in Japan, but Asia ex Japan we really haven’t focused on at all.”

She goes on: “We also want to do a lot more work in asset classes. Typically, when people start looking at responsible investment, they’ll start with their equities portfolios and what they can do there, in part because it’s easier.

“But how do you take responsible investment and do it in fixed income and how do you do it in infrastructure and in private equity?”

The organisation is currently gearing up for the UN Climate Change Conference due to take place in Paris this year, putting climate change issues firmly on the agenda.

Ms Reynolds says: “We have a lot of signatories asking us more and more about climate issues; about how do we really integrate thinking about climate change issues into our investment processes.”

Over the medium term, the PRI plans to open its first office outside of London. The intention is to open in New York this year to serve the North American market and then establish an office in the Asia Pacific region in the next five years.

She observes: “One of the great things about the PRI is that it’s global, but one of the endless challenges about being global is that you’re not working with one set of regulations. We have to be on the ground, understanding the regions and being part of the everyday fabric of that region and those investors as well.”

CV

Fiona Reynolds

2013 – present

Managing director, Principles for Responsible Investment

2006 – 2012

Chief executive, Australian Institute of Superannuation Trustees

2004 – 2006

Director, AUSfund

2002 – 2004

Director, Industry Funds Credit Control

1998 – 2006

Director, Women in Super