The challenge with transparency for asset owners now is to accept that this principle is critical to both fairness, universal ownership and healthy competition and it should extend the application of this principle to its own industry. Transparency is at the heart of the new environment, social and governance (ESG) paradigm. The first ever major collaboration between asset owners was the Carbon Disclosure Project (CDP) and so with disclosure was their very reason for such collaboration. As such, the principle was implied by CDP that openness and transparency were more important to stakeholders than allowing a company its right to withhold any information not required by law. In the same breath, CDP ensured that companies knew that the ‘commercial in confidence’ excuse for not being transparent had to be proved before being accepted. And so with the advent of the United Nations Principles of Responsible Investing (UNPRI) and its third principle, disclosure as a principle became enshrined in terms of extracting information from the assets in which asset owners invest.
The challenge with transparency for asset owners now is to accept that this principle is critical to both fairness, universal ownership and healthy competition and it should extend the application of this principle to its own industry.
This is not a straightforward process as asset owners are traditionally conservative and are not used to volunteering information no matter the justification. Nor do they, in some cases, have the internal support and framework to produce such information. And so all stakeholders must understand that culture and perhaps to some degree a fear of consequences play an important part in helping asset owners overcome their own natural resistance.
Of course there have been member and other stakeholder pressures already that have created awareness of the need for transparency and many commentators have joined the calls.
And there is increasing focus on codes and regulation designed to improve the quality and quantity of disclosure. The UK stewardship code highlights the benefit to investee companies from asset owner disclosure as it assists those companies to understand the strategies and approaches being adopted by their shareholders in seeking stability and returns. Ultimately, companies want to build attributes that will make their shares attractive to buy thus driving share price increases. For a high carbon company, having a strategy in the long term to gain competitive advantage over their emissions reduction strategies might be attractive to asset owners thinking of driving such attributes through their fund manager stock selections.
Furthermore, fund managers themselves want to know which asset owners are genuinely looking to allocate capital to the low carbon economy and which ones are simply using climate change as a customer marketing message. Thus, key material data around thematic allocations to low carbon assets and risk management practices are essential to an efficient market that can allow fund managers to plan and build capability to meet that anticipated demand.
Ultimately disclosure is the best tool that funds have to generate meaningful engagement with their members. After all, it is a member’s right to know how their fund is dealing with various material issues and ideally should allow them to choose the location of their retirement savings. In an increasingly knowledgeable member base, both financially and from an ESG perspective, members may want to choose based on their funds ability to manage the opportunities and risks associated with climate change. For those funds looking to lead in this area, this represents a great opportunity to prove the value of their approach. For those who do not believe it is such an issue, then transparency should hold no fear.
If the history of CDP is anything to go by, then recognition of climate change as a major long term issue driven by transparency has created enormous activity amongst high emitting companies. Many years on and the highest emitting companies all have invested significant resources, large teams and often made takeover or large capital investment decisions based partly on emissions and climate change related issues. Several companies have set their long term competitive advantage by alignment to their climate change strategies.
There is no reason for asset owners to think that they could not benefit in similar ways. Ultimately, if there is sufficient transparency to create a genuine market then the market will decide if their investment or lack of it in low carbon assets and climate change capability is a positive one. Without any information, all stakeholders are fishing in the dark based on loose understandings, hearsay and media release information.
In the Asset Owners Disclosure Project pilot held in Australia between 2009 and 2011, many asset owners found benefit simply from responding as it posed questions pertinent to their ability to manage climate change, helped overcome internal resistance and created internal and peer debate about the direction of best practice.
As asset owners around the world disclose more fully, best practice development and understanding is certain to accelerate. The benefit for all asset owners in that situation is a healthy, competitive market, more robust portfolios and a member base convinced that their fund has helped themselves and the financial system as a whole to avoid perhaps the greatest systemic risk of all.