Recently, the news has been dominated by stories of National Football League (NFL) players being arrested for assault, domestic violence and a series of other charges. The NFL is a private organization, functioning as a co-operative for the owners of the various teams. Its response to these issues with its “product” has been mixed and, by some people’s estimation, has not really addressed a systemic problem.

But what if the NFL was a publicly traded company (the league as a corporation and the teams as divisions or wholly owned subsidiaries)? How would you expect your investment manager to evaluate the business model, corporate policies and governance practices? Would you want your manager invested in NFL securities?

This topic is particularly interesting if viewed from the perspective of the Ontario government’s proposal to amend Regulation 909 of the Pension Benefit Act. This amendment will become effective Jan. 1, 2015, and will require Ontario registered plans to file statements of investment policies and procedures (SIPPs) with the regulator to disclose whether or not their SIPPs address environmental, social and governance (ESG) factors.

ESG, or sustainable investment, encompasses long-term, finance-driven strategies that integrate environmental, social or governance factors in investment arrangements. Looking at a company through an ESG lens can help determine whether a company’s future earnings, valuation or cost of capital will be positively or negatively impacted by ESG factors. Engagement with company management typically seeks to encourage corporate behaviours that are aligned with the interests of long-term investors.

This approach is advanced by the Principles for Responsible Investment (PRI) initiative, which has gained considerable support globally. Since its launch in 2006, it has attracted more than 1,200 supporters around the world, representing assets under management of US$34 trillion. Signatories commit to implement the principles where consistent with fiduciary duty and evaluate and report their effectiveness over time. Canadian signatories include 21 asset owners (many of the large public sector plans and universities) and 27 investment managers.

Back to the NFL and the response of the league and the impacted teams to the charges against their staff. The league has indicated it is developing a policy framework to deal with such situations in the future. Interestingly, many other professional sports are now reviewing their policies and procedures as well in light of the NFL’s problems.

Some corporate sponsors are withdrawing advertising support (a main source of revenue for the NFL) at the league, team and individual levels. Some sponsors have explicitly said that such behaviour does not mesh with their corporate values, while others have not publicly stated the reason for withdrawing their support. One can only imagine that consideration of the long-term impact on their brand and own corporate revenues had to factor into the decision.

In company terms such an incident would likely have resulted in a fall in shareholder value. Others have engaged the NFL in active debate in order to change the NFL’s policy and procedures with regard to these situations.

Going back to the question posed earlier, how would you want your investment managers to react in such a situation? Plan sponsors that hire active managers can have a dialogue with them regarding ESG factors and how these might impact portfolio construction. From a passive investment perspective, there are index managers who have developed index tilt products that overweight companies with positive ESG scores, based on research that, longer term, these companies tend to outperform. Index managers who often can’t divest from a company stock because of the mandate can still have a dialogue with company management on these issues in order to mitigate risk.

With Ontario’s proposed amendment and increasing focus on investment sustainability, plan sponsors are going to have to step back and assess beliefs and practices. As we have seen from this naive example above, the question is simple but the answer is never.

Janet Rabovsky is a partner at Ellement. She has more than 25 years of experience in the industry. These are the views of the author and not necessarily those of Benefits Canada.
Copyright © 2018 Transcontinental Media G.P. Originally published on benefitscanada.com

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