per Daniela Rocha
Sustainable development is one of the greatest challenges of this century. Society must act now, seek balance between man, nature and the economy. Although it is an incipient movement in the world, institutional investors have gradually assumed the role of inducing this change. Of course, there is a long way to go, however, several studies and indicators from non-governmental organizations and stock exchanges show that the importance that pension funds and asset managers give to information on environmental risks and opportunities as well as corporate governance practices in defining the value of companies. These are the so-called ESG indicators – Environmental, Social and Governance.
A survey conducted globally by the consultancy Ernst & Young (EY), the “Tomorrow's Investment Rules 2.0”, with the participation of 200 professionals from Asia Pacific (28.9%), continental Europe (28.8%), Australia (10.9%), United States and Canada (10.9%), United Kingdom (10 .5%) and Latin America (10%), indicated the very significant growth of concern about ESG risks in relation to companies from all sectors of the economy. Of the total respondents this year, 61.5% consider ESG information important for investment decisions.
In the 2014 edition of the survey, only 33.7% considered these topics relevant. “There is a greater perception of risks. Investment managers have more access to more information. Companies have intensified disclosures and the media is more focused on global warming and socio-environmental issues”, comments Leonardo Dutra, director of sustainability consultancy at EY.
Most investors (62.4%) are concerned about risks linked to assets that lose value prematurely or unexpectedly due to environmental or social problems, stranded assets. More than a third of respondents (36%) said they had reduced their investments in companies in the last year as a result of ESG risks. In Latin America, 57.1% of investors reduced positions in companies due to stranded assets. Subsequently, professionals from Australia changed the allocations more (40.9%). In Europe, the share was 37.3%, followed by Asia (29.5%) and the United States and Canada (21.7%).
To mitigate issues, 37% of investors said they use structured methods to analyze companies' ESG data. However, 64% of respondents highlighted that companies do not adequately disclose their risks. However, most institutional investors feel that integrated reporting, which follows the standards from the Integrated Reporting Council (IIRC)are beneficial, aid in decision making. Through this new model of accountability, the companies' financial management and socio-environmental data are intrinsically presented. In Europe, this was the finding of a universe of almost 70% of respondents and in the United States, 65%. In Latin America, 57% highlighted that integrated reporting is advantageous. According to the survey, 72% of investors emphasize the need to implement metrics, comparative bases for the assessment of socio-environmental impacts on production. “Investors demand more structured information from companies. They have been vectors of change by questioning companies about the risks”, highlights Dutra.
For the EY consultant, Investor Relations (IR) professionals need to be qualified in sustainability. In Brazil, by the way, Instruction 552/14 of the Securities and Exchange Commission (CVM), which came into force in January, brought changes to the Reference Form, including environmental risks. “The IR professional should pay attention to respond to investors on these aspects”, adds Leonardo Dutra.
For Glaucia Ground, representative of Global Reporting Initiative (GRI) in Brazil, there have been significant advances in the quality of company disclosures, but it considers investors' complaints about the lack of adequate data on ESG risks to be consistent. “We have noticed advances, however, unfortunately there are still companies that treat the Sustainability Report or the Integrated Report as a 'poetry' document, reinforcing self-congratulations”, he says. For example, by the GRI standard, companies must detail the fines and provisions, as well as what is being done to mitigate risks or reduce negative impacts to the business, however, most do not put such explanations in the documents satisfactorily. “Inside companies there are professionals in the area of sustainability who know what information should be included in the report, but when the document goes through the approval process, before being released, a lot of things end up being cut by the leadership”, he emphasizes.
Several episodes have given investors a red light in recent times. In October of last year, the United States announced a settlement of more than US$ 20.8 billion in damages to be paid by BP, the British oil company due to the oil spill in the Gulf of Mexico in 2010. It was the highest amount against a single company in American history, said US Attorney General Loretta Lynch. The BP rig explosion, the worst offshore oil disaster in US history, killed 11 workers and spilled millions of barrels of oil for nearly three months. At the time, The New York Times carried an article citing internal company documents that showed that BP had been concerned about platform safety long before the incident. According to the American newspaper, in June 2009, the oil company's engineers had reported that the metal casing that BP wanted to use in the well was at risk of rupture under high pressures.
Here in Brazil, in mid-January, the Federal Police reported that it had indicted Samarco, Vale, the company VogBR and seven other executives and technicians for environmental crimes as a result of the failure of the Fundão dam, in Mariana, Minas Gerais, in November 2015. Among those indicted is Ricardo Vescovi, CEO of Samarco. The tragedy left 17 dead and two missing. The mud traveled along the Rio Doce and reached the Espírito Santo Sea. “The losses are enormous, it is difficult to monetize all the damage”, highlights Glaucia Terreo. The risk of failure of Samarco's Fundão and Santarém dams was alerted in 2013 by the Pristino Institute, an institution that carried out a technical study in the region at the request of the State Public Ministry. Vale dropped the Corporate Sustainability Index (ISE) from the stock exchange in November last year, when the new portfolio was announced.
Petrobras is another case negative because of allegations of corruption, with lengthy investigations within the scope of Operation Lava Jato by the Federal Police. The company was removed from the Dow Jones Sustainability Index in March 2015, of which it had been a member since 2006. There were flaws in the governance structure and risk management. In addition, currently, the sharp drop in oil prices in the international market has negatively affected the company. On January 18th, Petrobras' share on the stock exchange reached its lowest value since 2003 and ended at R$ 4.80. The situation is complicated since there is no prospect of a recovery in the price of oil anytime soon and the company has reduced investments.
The water crisis in the country and the high price of energy are other points of attention to the market. Investors are vigilant.
Climate change and market forces
Climate change has challenged the traditional approach to risk management, which has always been heavily based on historical series. On the other hand, it opens the door to innovations. The CDP (Carbon Disclosure Project) is an international non-profit organization based in London, England. The entity works with market forces. In this way, investors invite companies to answer questionnaires on climate change, water and forests. The base is the BM&FBovespa's iBrX10. Each of the questionnaires is divided into five modules: governance and strategy, risk management, goals and actions, how to communicate to the market and opportunities detected. “There is a recent movement of institutional investors taking a more active stance to promote transparency,” he points out. Juliana Lopes, director of CDP in Latin America. Between 2010 and 2015, there was a significant evolution of engagement. In five years, CDP registered an increase in the number of signatory investors: 54% in the climate change program; 350% for water and 832% for forests. The number of responding companies increased in this period: 35% in the climate change program; 200% for water and 50% for forests.
Since February of last year, CDP has been offering investors sectoral analysis, linking climate change metrics. The latest report is on the mining sector. Surveys were also launched on the automotive, electrical and chemical sectors.
According to Juliana Lopes, the COP discussions (Conference ofUnited Nations on Climate Change) and the agreement signed on greenhouse gas emission reduction targets impose changes in business.
Sign of the times. It highlights the global initiative of large institutional investors, thePortfolio Decarbonization Coalition (PDC), which in 2014 had announced its intention to divest US$ 100 billion in activities that emit greenhouse gases and direct these resources to less intensive initiatives. The surprise came in November last year, at COP-21. The investment decarbonization target exceeded US$ 600 billion, with 500 major players involved. Mat Andersen, CEO of AP4, a Norwegian pension fund, which is part of the PDC, argued that, motivated by fiduciary duty, profit maximization and risk minimization, institutional investors analyze, seek to understand and reduce exposure to climate risks.
Another initiative that works to involve investors in sustainability is the Principles for Responsible Investment (PRI – Principles for Responsible Investment), originated ten years ago in the United Nations (UN), today independent. The objective is to promote the integration of ESG data in the analysis and monitoring of investments. In South America, Brazil has more signatories. There are 57 pension funds, investment managers, brokers and the stock exchange itself, emphasizesTatiana Assali, PRI's head of South America. Brazil has a PRI representation, that is, it operates locally, since 2006. Worldwide, there are 1,500 investors and service providers in the signatory base. Membership is voluntary. According to Tatiana, investors should be more involved in management, participating in meetings and seeking companies with consistent practices. “Transparency is an eternal challenge. However, there are companies working together with investors in a more open way, discussing sustainability planning and ESG data”, says Tatiana Assali.
For Sonia Favaretto, director of Sustainability at BM&FBovespa, has increased investor activism. “On the stock exchange, there is greater demand to know what companies are doing, more interest in companies that open the answers to the ISE (Corporate Sustainability Index”, highlights Sonia. The companies participating in the portfolio can authorize the disclosure of responses from the questionnaire to adhere to the index. In 2014, 85% authorized it, while in 2015, there were 94%.
As an inducer of transparency, in 2011, the exchange launched the “Relate or Explain” action for a Sustainability report. In 2014, the initiative aligned itself with the international Integrated Reporting movement, demonstrating its support for the IIRC (International Integrated Reporting Council). Companies inform whether they publish a sustainability report or an integrated report. If so, they must indicate the website where it can be accessed. If not, explain why they don't. At the beginning, 45.3% of the companies joined. Last year, the share rose to 71.6%.
fiduciary duty
In the evaluation of Mauro Rodrigues da Cunha, president of the Association of Capital Market Investors (Amec), the concern of investors on ESG issues has advanced, however, at a much slower rate than it should. In Brazil there are more than 500 pension funds and assets, with 62 registered with Amec. According to him, the EY survey sampled 200 institutional investors worldwide, the largest and most expressive. “In Brazil, our associates are not as attracted to these topics as we would like”, he says.
On the agenda, there are still other pressing issues. Given the very weak performance of the Brazilian economy and the stock market operating at 38,000 points, the president of Amec sees a complicated situation. Only large institutional investors are able to retain specialized professionals and rely on good evaluation instruments. “The reality of the capital market is so bad that it does not allow entities to allocate the resources that would be minimally needed to address these topics (ASG). There are teams being reduced”, adds Mauro Rodrigues Cunha.
However, he believes that the incident of the collapse of the Samarco dam in Mariana, the investigations of allegations of corruption at Petrobras are raw material to show that the matter is relevant.
Amec remains proactive. The entity is working to launch on October 26th, when it completes 10 years of activities, the Stewardship Code, a governance code for investors, that is, how they should approach their own fiduciary duty and their role within the framework of capital market controls. “The objective is to make the institutional investor think like the owner of the company, not as an intermediary, in this way, they will pay more attention to the issue of sustainability”, he emphasizes. The English experience, with over 300 signatories from the Stewardship Code, represents a successful case. It is an evolving topic in the world.
Gustavo Pimentel, director of Sitawi, an organization that advises institutional investors with ESG consulting and research, the establishment of a Stewardship Code is essential. “This will provide greater clarity to investors that they can and should incorporate ESG analyses. I believe they are more aware, but few have developed adequate capabilities, processes and tools to assess these risks,” he says. According to him, Brazil has resolution 3792 that requests investment practices from pension funds, which must describe whether or not they adopt ESG. But this alone is not enough to achieve stronger involvement. In 2014, Sitawi conducted a survey with 50 pension funds and one of the results was that 67% made reference to responsible investment. A new study will be conducted this year. This was a good sign, but the organization was unable to measure how much they used ESG elements to anchor their decisions.
In the United States, according to Pimentel, the Employee Retirement Income Security Act(Erisa), which regulates pension funds, was updated in 2015, making it explicit that ESG integration is compatible with fiduciary duty, something that was controversial. “In the United States there were contradictory legal theses. The issue was pacified”, he concludes.
Source: Magazine RI Ed. 200/Feb 2016
