Caldecott & Rook: Investment consultants and green investment – Risking stranded advice?

Executive summary:

Investment consultants (ICs) play a key role as advisers to asset owners (AOs). They provide strategic advice to AO boards about asset allocation and develop plans for how AOs can achieve the performance they need to match liabilities. The advice from ICs is also used to construct mandates for asset managers and they often assess asset manager strategies and/or help AOs select asset managers for mandates. Examining these and other roles played by ICs makes it evident that they occupy a key position as ‘gatekeepers’ for many AOs, and that they operate at the interface between different parts of the investment ecosystem. As such, they are instrumental in determining whether innovative ideas are accepted or not by the financial community. This role as gatekeeper applies to products and services related to green investment1. Yet extensive formal and informal dialogue with diverse stakeholders suggests that: how ICs are engaging with their AO clients may not be accelerating innovation in and uptake of green investment practices. Instead, and in general, they seem to be hindering them. As a consequence of these observations from stakeholders, we inaugurated a project to investigate and understand what is happening and why.

Available for download here.

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Borgersa, Derwalla, Koedijkb & Horst: Do social factors influence investment behavior and performance? Evidence from mutual fund holdings

Abstract:

When tastes affect investment decisions of a significant number of investors they have the potential to affect asset prices and consequently also expected returns (Fama and French, 2007). In this paper we evaluate whether tastes for socially sensitive stocks affect holdings of U.S. equity mutual funds. We start with a comparison of socially responsible investment funds to conventional funds and document on the existence of conventional funds that have “more socially responsible” holdings than SRI labeled funds. Subsequently, we analyze whether these exposures to socially sensitive stocks affect mutual fund performance. Our findings indicate that especially investments in Tobacco, Alcohol, and Gambling stocks have the potential to positively affect risk-adjusted fund returns, while exposures to the most socially responsible firms negatively affect performance. This potential is not fully exploited by the mutual funds in our sample as they hold diversified portfolios resulting in small exposure differences between funds. These small exposure differences also explain why the literature has generally found no performance differences between SRI labeled and conventional funds. Based on our main findings we advice the use of holdings based analyses when investigating the effects of social tastes on investment portfolios.

Available for download here ($).

Clarvis, Bohensky & Yarime: Can Resilience Thinking Inform Resilience Investments? Learning from Resilience Principles for Disaster Risk Reduction

Abstract:

As the human and financial costs of natural disasters rise and state finances continue to deplete, increasing attention is being placed on the role of the private sector to support disaster and climate resilience. However, not only is there a recognised lack of private finance to fill this gap, but international institutional and financing bodies tend to prioritise specific reactive response over preparedness and general resilience building. This paper utilises the central tenets of resilience thinking that have emerged from scholarship on social-ecological system resilience as a lens through which to assess investing in disaster risk reduction (DRR) for resilience. It draws on an established framework of resilience principles and examples of resilience investments to explore how resilience principles can actually inform decisions around DRR and resilience investing. It proposes some key lessons for diversifying sources of finance in order to, in turn, enhance “financial resilience”. In doing so, it suggests a series of questions to align investments with resilience building, and to better balance the achievement of the resilience principles with financial requirements such as financial diversification and replicability. It argues for a critical look to be taken at how resilience principles, which focus on longer-term systems perspectives, could complement the focus in DRR on critical and immediate stresses.

Available for download here.

Romero: What lies beneath? A critical assessment of PPPs and their impact on sustainable development

From the Executive Summary:

Public-private partnerships (often referred to as PPPs) are increasingly promoted as a way to finance development projects. Donor governments and financial institutions, such as the World Bank, have set up multiple donor initiatives to promote changes in national regulatory frameworks to allow for PPPs, as well as provide advice and finance to PPP projects.

PPPs also feature prominently in the discussions around the post-2015 and the financing for development agendas. Currently, there is a strong push to increase the involvement of the private sector in the development arena and to promote PPPs as a key tool to reach the soon to be agreed sustainable development goals. This report shows that the last decade has seen a huge increase in the amount of money invested in PPPs in developing countries. From 2004-2012, investments in PPPs increased by a factor of six, from US$ 22.7 billion to US$ 134.2 billion. This has been driven by economic growth and thus the need for infrastructure development, but also by low interest rates in developed countries which has driven investors to ‘search for yield’ elsewhere.

Although investments in PPPs fell in 2013 to US$ 84.4 billion, current estimates indicate that the developing world will experience a new wave of PPPs in the near future. However, it is important to note that despite the promotion of PPPs, private finance only provides about 15–20 per cent of total infrastructure investment. The lion’s share is still provided by the public sector, and this situation is likely to continue. Therefore, questions remain about why so much focus is placed on the private sector rather than improving public sector delivery. This report looks at the empirical and theoretical evidence available on the nature and impact of PPPs, and analyses the experiences of Tanzania and Peru. It critically assesses whether PPPs deliver on the promises of their proponents and gives concrete recommendations for policymakers.

Available for download here.

A Primer on Norway’s Divestment from Coal

The following post comes from Sheri Kindel:

Norway’s recent decision to sell off coal investments from the world’s largest sovereign wealth fund is the biggest divestment from coal in history. Due to its size, this decision will likely cause other investors and governments to follow.

The Norwegian fund, called the Government Pension Fund Global (GPFG), was built on wealth from oil and gas reserves off the nation’s coast and served as a buffer for when its offshore wells ran dry. Many people, inside and outside the fund, refer to it as the “oil fund.”

On May 27, 2015, Norwegian politicians received 44,000 petition signatures for the GPFG to divest from fossil fuels. After parliament also issued a unanimous recommendation to divest on the same day, it wasn’t long before the fund announced its plan.

On June 5, 2015, Norway’s parliament endorsed the divestment from its $900bn sovereign wealth fund, affecting 122 companies across the world. Major U.S. utilities to be affected by this decision include American Electric Power Company Inc., Dominion Resources Inc., Duke Energy Corp., MidAmerican Energy Co., NRG Energy Inc., PLL Corp., Southern Co. and Xcel Energy Inc. According to a spokeswoman, the reasons for divesting include “long-established climate-change risk-management expectations.” While a climate-related investment strategy evolved in 2010, Norway recently joined a growing list of organizations that have pledged to give up some of their fossil fuel investments, including many cities, universities, and religious institutions.

The fund sets an example for others in shifting from polluting energy sources towards clean, renewable power. It will eliminate companies from its portfolio if more than 30% of their revenue-generating business activity involves coal, totaling $8.7bn of the fund’s current investments and 1.2% of the fund’s investment portfolio. The percentage is based either on the company’s activity or on the revenue that comes from coal, including mining companies and power companies that burn coal respectively. Therefore, this new plan will mostly impact mining and utilities.

Nonetheless, according to the head of Greenpeace Norway, Truls Gulowsen, “Norway is also still engaged in Arctic oil drilling, so while this is great news, there is still lots of work to do for Norway before it can brand itself as truly climate friendly.” For the United States as a whole, Global Climate Convergence recommended the transition away from unabated coal to be complete in 2030.

The new guidelines for the GPFG will take effect by January 1, 2016 and are a critical first step away from fossil fuels. At this time, the fund will begin divesting in its portfolio according to the percentage standard set out above. To achieve full divestment, Greenpeace, World Wildlife Fund, Future in Our Hands, 350.org, and Urgewald claim they will campaign for the GPFG to invest at least 5% of its value in renewable energy sources, specifically in emerging economies. In a joint statement, they asserted, “For Norway itself, our goal is a just transition out of oil and gas and into the green jobs of the future. We are rapidly approaching the time when no country can rely on fossil fuels for its economy or energy safety.”

Coates: The Increasingly Visible Hand of Government behind Corporate Citizenship & Conscious Capitalism

Abstract:

This paper examines three recent and significant policy actions by the governments in India, the United States, and the European Union that make dramatic changes in how global societies view corporate behavior in the home and host country regions where economic benefits are accrued. These interventions point to growth of sharper policy instruments to push for Corporate Social Responsibility (CSR) obligations in nation states. The familiar concept CSR has spun-off important notions of Corporate Citizenship, and Consciousness Capitalism. Both of these conceptualizations build on Elkington’s Triple Bottom Line (TBL)—which remains the central tenet of CSR philosophy. This paper discusses the three cases of government interventions in India, U.S. and EU. It argues that the new era of an increasingly visible hand of government has dawned to counteract market failure on the TBL, and to foster national and global sustainability values.

Available for download here.

Rabinowitz & Prizzon: Financing for development

ABSTRACT:

With a new and more ambitious set of Sustainable Development Goals (SDGs) being negotiated in 2015, understanding how financial resources and mechanisms can help achieve them and how development can be financed more effectively becomes more crucial than ever before. However, evidence on the contribution and effectiveness of development financing to large-scale interventions is scant in some sectors and, where available, ambiguous. This synthesis paper attempts to partially fill this gap by drawing on the large body of evidence and lessons from the country case studies of the ‘Development Progress’ (DP) project. This project aimed to explain how progress has happened in 50 developing countries in the past two decades across eight dimensions of well-being. Finance features as one of the main factors contributing to development progress across these countries, and is addressed in detail in 20 of the DP project case studies. This working paper therefore predominantly draws on evidence from these case studies. Assessing a direct causal link between financial resources and development outcomes and outputs is challenging, especially across the very diverse sectors reviewed in the DP project. Nonetheless, we identified some common patterns across several case studies.

• Progress is often associated with sustained economic growth performance and with shifting financial burdens for accessing services from households to governments and/or to bilateral and multilateral donors.

• Improvements in well-being indicators were correlated both with policy advice and a rise in external assistance from bilateral and multilateral donors in the lowincome and lower-middle-income countries reviewed in the project.

• In those middle-income countries whose aid volumes were small in proportion to the size of their economy, technical assistance was usually targeted to areas where the government had low capacity and effectiveness, making a substantial contribution to improvements in well-being.In those middle-income countries whose aid volumes were small in proportion to the size of their economies, technical assistance was usually targeted to areas where the government had low capacity and effectiveness, making a substantial contribution to improvements in well-being.

Mutamba & Busari: Strategic Coordination for Sustainable Investment in Critical Infrastructure

ABSTRACT:

In demonstrating the prime place of infrastructure investment in its national long-term development framework encapsulated in Vision 2030, as well as in the related New Growth Path, South Africa recently put together a comprehensive National Infrastructure Plan. Aside from mapping out short and medium-term priorities for scaling up investment in strategic sectors and enhancing infrastructure links across the country, the initiative underscores development objectives such as community empowerment and skills development. This paper zeroes into one of the 18 strategic programs in the plan—specifically devoted to water and sanitation infrastructure—and presents the principal elements for pursuing effective inter-project coordination and integration, as well as,
ultimately, for ensuring the sustainable implementation of critical infrastructure. The approaches that have influenced the success of strategic coordination include participatory planning, project prioritization, regular tracking and unblocking of implementation hurdles, localization, active stakeholder engagement and ongoing program integration.

 

Available for download here.

Clapp: Responsibility to the Rescue? Governing Private Financial Investment in Global Agriculture

ABSTRACT:

This paper examines the rise of initiatives for responsible agricultural investment and provides a preliminary assessment of their likely success in curbing ecological and social costs associated with the recent growth in private financial investment in the sector. I argue that voluntary responsible investment initiatives for agriculture are likely to face similar weaknesses to those experienced in responsible investment initiatives more generally. These include vague and difficult to enforce guidelines, low participation rates, an uneven business case, and confusion arising from multiple and competing initiatives. There are further weaknesses that are likely to emerge, especially with respect to efforts to govern private financial investment in the sector. The large diversity of investors and high degree of complexity of financial investments complicate efforts to discern who bears the burden of responsibility in practice. Rather than ensuring responsibility, these initiatives may instead only serve to shift the discourse from one that is critical of the potential negative implications of such investment, to one that sees the positive potential of private financial investment in the sector.

Available for download here.