The Role of Investment Consultants in Transforming Pension Fund Decision Making: The Integration of Environmental, Social, and Governance Considerations into Corporate Valuation

The global financial crisis of late 2007 and beyond is arguably the most severe financial crisis since the Great Depression. A number of the world's leading financial institutions have either gone bust or been bailed out by government, global capital markets remain in a climate of unease and limited confidence, and governments around the world had to return to Keynesian pump-priming fiscal policies to stimulate domestic economies into action and salvage the financial sector. The scope and scale of this crisis has encouraged academics to reflect on what went wrong. While it is popular for journalists to lay blame on the generic figure of the City Banker, this view does not given sufficient credit to the fact that the world's largest asset owners themselves have suffered deep blows from this crisis. Indeed, the shortcomings of financial markets appear to be more complex than the big bonuses of bankers alone. In order to delve beneath the surface, this chapter therefore examines the investment processes around the world's largest asset owners: pension funds. Given their long-term time horizons and their exposure to multiple geographies and sectors, pension funds have been described as "universal owners."¹ With command of US$ 28.2 trillion of the US$ 74.3 trillion global fund management industry, pension funds have a vested self-interest in the stability of global financial markets.² In the context of a global financial crisis, universal ownership should, in principle, make pension fund managers conscientious participants in systemic reforms to the economy. Yet it is questionable whether most pension funds are actually capable of effectively employing their strength as universal owners. In order to examine this we adopt an economic geography approach to examine the relationships between actors and institutions engaged in the investment process of pension fund money. We extend on the literature on pension fund governance by specifically examining the role of investment consultants.³ Investment consultants act as intermediaries between pension funds and asset managers. As such, their relational geography in the investment process gives them a conflicted role: they are "thought leaders" driving innovation in investment management practices while also being contractually committed to the demands of their client. We use the emerging concept of environmental, social, and governance (ESG) considerations as a lens through which to examine the relational geography of investment consultants. ESG considerations are a valuable analytical tool in the context of the financial crisis, as we argue that the failure to incorporate ESG considerations into investment analysis is a contributing factor to the current crisis facing financial markets. We develop our arguments from a series of six case studies collected from questionnaires sent to leading global investment consultants with the assistance of the Asset Management Working Group of the United Nations Environment Programme Finance Initiative. The six investment consultants relied upon are headquartered in the U.K., the U.S., and Japan. However, their operations are spread across other markets (e.g., Canada and the Netherlands) with large funded occupational pensions.⁴ This chapter proceeds in the following manner. The second section sets out what we perceive to be the geographical conundrum at the heart of the global financial crisis. The subsequent section then examines the emergence of ESG integration as an effort to bring investors closer to the local conditions facing their investments. We note that this chapter does not assert the merits of ESG as an investment tool but rather is interested in its penetration and uptake within the pension fund investment process. The fourth section locates investment consultants within the relational geography of pension fund investment management. The fifth section discusses the data used in the chapter to examine these issues and the sixth presents the results of consultants' views on ESG integration techniques and principles in detail. The final section discusses the implications of these results in terms of the difficulty of driving new alternative methods of investment analysis.