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Lessons from the PRI-CBERN Academic Conference 2012
Academic conferences are not only a platform to discuss past and present research findings but can also be a means to spark ideas for future research undertakings. As I sat throughout various workshops at the 2012 PRI-CBERN Academic Conference, I asked myself “Would the same conclusion apply in impact investing? Would the methodology for gathering data be different? Could this hypothesis be tested on impact investors?”
The principal-agent problem for responsible investing
In his keynote address, Sebatien Pouget of the Toulouse School of Economics discussed his research on the principal agent problem between asset owners and asset managers. His paper discusses how the short termism of the financial markets and the short-term performance tendency of asset management contracts are at odds with investors that have a long-term horizon. He discussed how this mismatch could affect responsible investment (RI) decisions that have long-term value as opposed to short-term high performance.
To mitigate this principal agent problem, Pouget proposed that blended incentives for asset managers (short term and long term) could ensure a balance between short-term performance and long-term value creation.
Overcoming the principal-agent problem in practice
Pouget’s keynote was followed by a panel of RI practitioners discussing how they manage the principal agent problem with their investors. We heard from Daniel Simard of Bâtirente as he discussed the role of transparency and communication between Bâtirente’s fund and investors and the importance of disclosing risk management.
Bringing a different perspective, Brigid Barnett, Manager of Responsible Investing of the CPP Investment Board, discussed how RI transcends several investment focuses at the CPP and how managers use ESG reporting and disclosure throughout a range of investment decisions. Barnett placed importance on talent and stressed that there are RI motivated individuals in the market and as such, principal agent value alignment is possible. As much as incentives play a role, finding asset managers with the right motivation can overcome the principal agent problem as well.
Principal-agent problem in impact investing
While we define “impact first” and “finance first” investors based on the motivations of investors, we assume that these investors know what impact investing is, or at least have a sense of the impact investing products available to them. But what if they don’t?
Depending on the motivations and incentives of their asset managers or their own level of involvement in managing their assets, asset owners may or may not have the knowledge or resources that they would need to make a decision on what (if any) role impact investing could play in their portfolio. In impact investing and especially with “impact first” products, could a different type of principal agent problem exist in the general education and awareness of these products to investors?
If there is a principal agent problem in impact investing, do the theories above and existing best practices on incentives and motivating factors for wealth advisors and asset managers apply? And if so, how do we incentivize asset managers to educate their investors about “impact first” products? Are there other incentives we could use, such as tying incentives to impact instead of financial performance? Or does it come down to motivation?
This could be another avenue for impact investing focused research in responsible investing. Workshop sessions geared toward private equity have similar implications for additional research in Canada as well.
RI in private equity and the price of unsustainability
Vanina Forget, Department of Economics of Ecole Polytechnique ParisTech, presented two of her her research projects entitled, “Think global, invest responsible: Why the private equity industry goes green” and “The price of unsustainability: An experiment with professional private equity investors”.
In the former, she aimed to answer the question, “What drives SRI in private equity?” and particularly what factors have led to the increase in green and socially conscious investments in the private equity market. In her research, she discovered that mostly large, mainstream private equity players drove SRI in their strategies. Their motivations to do so include SRI as a means for new value creation, better risk management and a way to differentiate amongst other PE firms when it was difficult to raise funding from LPs. Forget’s research was focused in France and going forward, she posed the question, “Do drivers differ in other PE markets?” For RI in Canada and North America in general, understanding the private equity drivers, in the Canadian context, could help researchers and private equity funds understand where the ESG trend is going in Canada and the factors that influence SRI activity.
Forget’s second research project was designed to understand if and how sustainability creates value in the eyes of an investor and in essence if “doing good really does well?” Unlike the conventional usage of data collection via surveys, Forget and her co-authors sought to understand how fund managers react to sustainable and unsustainable factors in potential investments and if (and how) this affects deal pricing.
In an experiment, Forget and her team posed a series of companies (of various sizes, operating in various industries) to a randomized group of fund managers and asked them to calculate the enterprise value of each and decided whether or not they would invest.
Afterwards, they added various sustainability factors to each company (positive and negative factors) and asked them to recalculate their EV and decision. An analysis of their results led to the conclusion that both negative and positive sustainable practices affect firm value, but negative sustainable practices decrease firm value more than positive sustainable practices increase firm value.
Implications for impact investing and private equity
Both of Forget’s research projects shed light on the environmental, social and governance behaviour of private equity funds and the factors that drive and affect responsible investing. These lessons (and subsequent research) can be explored not only in Canada but also framed specifically for impact investing as they have been for responsible investing. Understanding what has driven the trend of impact investing in private equity and how it has unfolded are beneficial to the development of the marketplace as a whole.
I look forward to the next PRI-CBERN Academic Conference and learning more about the factors and issues shaping responsible investing. The conference set the groundwork for subsequent academic research and inspired new ways of thinking. I’m excited to see what comes next!
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