In its 2014 global outlook, Standard Life Investments stated that around 1,100 of all asset owners, investment managers and service providers around the world now adopt these principles, representing a total of US$32 trillion in assets under management.
The principles, first established in 2006, encourage signatories to consider the financial materiality of Environmental, Social and Governance (ESG) matters and how ESG factors may affect long-term investments.
The outlook claimed companies are also increasingly considering sustainability issues despite market volatility in recent years.
According to the outlook, only 64 per cent of the world’s 250 largest companies reported on sustainability activities in 2005; by 2011 this figure had grown to 95 per cent.
Standard Life Investments’ head of responsible investing, Amanda Young, said companies can no longer operate in isolation.
“The way firms conduct their business affects both the environment and society, as is evident from BP’s Macondo incident,” said Ms Young.
“The environmental and social externalities that companies need to consider as part of their business strategies evolve and change constantly and can pose significant financial risks for organisations.”
Ms Young explained in the outlook that integrating ESG factors into the overall investment process ensures the entire investment team understands the implications of environmental and social risk and opportunities in a wider context.
“We engage with companies on how they manage these risks and aim to capture the areas which are financially material that may not be priced in by the market,” she said.
Extractive industry companies operating in the developing world, for instance, may be required to support local infrastructure and social projects before obtaining a licence from the host government, said Ms Young.
She also said increased government regulation of ESG issues, such as the US Foreign Corrupt Practices Act (FCPA), affects companies.
This act applies to any company under the US Securities and Exchange Commission and consequently captures many companies listed outside the US, said Ms Young.
“Companies wishing to avoid being prosecuted and fined under the FCPA will need to ensure robust business ethics policies and procedures are in place,” she said.
“Fines can be significant, directly affecting shareholder returns and risking the company’s continued licence to operate.”
Ms Young said Standard Life Investments was focused on issues such as human rights, labour issues, environmental protection and anti-corruption.
“We engage actively with companies to understand how they manage these risks and to drive improved performance,” she added.
