On February 25 an event took place that strengthened the view that a superior financial return can be achieved through investment in companies that are consciously reducing their environmental footprint. Three global investor groups (Kohlberg, Kravis Roberts & Co, Texas Pacific Group and Goldman Sachs private equity) jointly acquired the Texas-based utility TXU, for $45m, including all debt.
Their partnership, the deal’s size and the investment profile was not out of the ordinary. But what was remarkable about the news was that a Texas-based utility that is not known for its environmental stewardship was assuming environmental leadership in an industry not exactly known for its green credentials. The conditions placed on the deal are worth noting.
Under their joint ownership, TXU will:
Reduce the number of coal-fired plants it will build in Texas from eleven to three;
Support carbon reduction legislation and participate in a cap-and-trade system to manage TXU’s carbon footprint;
Invest $400m to either buy or create renewable energy;
Link executive performance to TXU’s environmental performance;
Establish and work with an environmental advisory board that includes the Environmental Defence Fund and the Natural Resources Defence Council; and
Seriously investigate the applicability of cleaner-burner coal technologies to TXU operations.
It isn’t a huge leap of faith to argue that this group of hardcore investors, known for their relentless pursuit of superior returns, see a financial upside to be achieved as a result of placing sustainability at the heart of their business strategy for TXU. Without the six conditions, there wouldn’t have been any investment. Without a vision for superior returns, there would have been no investment. From both perspectives, the sustainability potential of TXU brought the deal together.
A little further north, one of the largest and fastest-growing pools of investment capital in the world has been linking its investment growth strategy to a positive environmental and social performance, within a strong governance framework. Grown from CN$44.5bn in 2000, to CN$110.7bn in 2006, the Canadian Pension Plan is expected to be worth CN$250bn by 2016. This is good news for the 16m Canadians who contribute to the CPP!
The financial strength and impressive record of growth of the CPP today can be linked to reforms that took place in 1996/97, which are now recognised internationally as a best-practice model. While the reforms had many elements, their focal point was an explicit investment-only mandate to maximise investment returns without undue risk of loss.
The result: impressive growth and a steadily increasing commitment to responsible investment and disclosure of environmental, social and governance (ESG) factors. The CPP published its policy on responsible investing in October 2005. At that time, the policy included a commitment to engage companies with the disclosure of, and performance on, ESG factors. In addition, the CPP proxy voting guidelines state: “The CPP investment board will support resolutions that request the reasonable disclosure of information relating to ESG factors.” In 2006, the CPP issued proxy votes on 12,400 resolutions at shareholder meetings. As an owner, on average of 2-3% of most large Canadian companies, the consistency of the CPP’s message is being noticed.
A member of the Enhanced Analytics Initiative, a signatory of the UN Principles for Responsible Investing, the Extractive Industries Transparency Initiative and of the Carbon Disclosure Project, the CPP is now advocating for a standard similar to the international accounting standard GAAP to measure a company’s carbon footprint. It is also advocating for certainty in environmental regulation. Don Raymond, CPP’s senior vice-president of public market investments, says: “What we want from government is equally straightforward, that is regulatory certainty. Regulatory certainty will provide the framework for market forces to drive positive change on ESG factors”.
The increasing investor attention to a company’s place within the climate change agenda is obviously good news. Yet, it remains to be seen how quickly the attention paid to the climate-change file will translate into equally detailed attention to other environmental impacts (such as toxic waste, water pollution), and to a wide range of social indicators that are not yet on the radar screen. There remains a long road to travel towards ensuring that the ESG factors considered offer a true reflection of the social, environmental and financial impact of any business.
Stephanie Robertson is president of the SiMPACT Strategy Group, which facilitates London Benchmarking Group Canada.
COMMENTS