The ‘S’ in environmental, social and governance (ESG) is complex to implement in investment strategies, particularly in relation to companies that pay little tax because they tend to be the most profitable, B&CE chief investment officer Nico Aspinall told a conference in London today.
Speaking at State Street Global Advisors’ Creating Sustainable Retirements conference today, Aspinall said tackling tax avoidance behaviour by corporates was a difficult challenge because of the direct correlation between the profitability of companies and the tax they pay.
Aspinall’s comments highlight the complexities of implementing a potentially very wide range of ESG factors into workplace pensions, while continuing to ensure that performance is not negatively impacted.
Aspinall said: “Tax is a terrible issue. We are being very focused on climate change within the responsible investment policy. In that engage bucket is the list of issues that goes into the engagement approach. Our analysis is do we believe that data on a particular issue will lead us to have better portfolio returns? This is a very difficult question to ask in the light of tax, because companies that pay the least tax make the most profits – literally there is a correlation there. So it is not a question I am trying to ask very hard.
“There is a longer term argument about that top level fiduciary duty, about the impact on the society around us. It is a ‘universal owner’ argument which is that if the companies do not pay the tax then for the member, an amenity is lost, or there is a benefit they will have to pay from their own pocket. So we go into the engagement piece where we say there are all sorts of issues we are worried about – so we have the workforce disclosure initiative looking at how well people are paid, the conditions they are working under, and ensuring they are good social citizens. S is part of that process –we are looking at extending our ESG screening process to exclude companies that are controversial across a broad range of topics.”
State Street Global Advisors head of ESG investment strategy EMEA Carlo M. Funk added: “You have measurements, like if you are a UN Global Compact violator, which for most cases is the clear ‘S’ component. Additionally if you look at Sustainability Accounting Standards Board (SASB) you have a clear S measurement for the specific industry and if you have a company are in this industry and you can see you are scoring badly, you have a very tangible way of engaging with them. You can pinpoint them and say ‘you need to get better’.”