Interview with Martin Skancke, PRI's Chairman_新浪财经

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Sina Finance·ESG | China ESG Leaders Association　

　　Interview with Mr. Martin Skancke, Chairman of the PRI Board (新浪财经专访UN PRI主席马丁·思坎克（英文版）)

　　Martin Skancke, Chairman of the UN PRI Board, was interviewed at the Sina headquarters in Beijing on October 12th.

　　ESG Channel at Sina Finance is the first ESG-focused financial news channel in China, with a commitment to provide timely, comprehensive and objective ESG news contents to its audience.

　　Principles for Responsible Investment (UN PRI) is an investor initiative that works with the UNEP Finance Initiative and the UN Global Compact. At present, 2,600 organizations from more than 50 countries around the world have signed the six principles of PRI, and the total assets under management of the signing members exceed US$89 trillion. Martin Skancke was appointed Chair of the PRI Board in April 2014 and re-elected in 2017 for a second term. He had also been responsible for the Norwegian pension fund, one of the world's largest sovereign wealth fund.

　　An Interview Transcript is as follow (Interview Transcript in Chinese):

　　Climate Change and Energy Transformation Are Important Issues for PRI

　　SINA FINANCE: Let's start with some recent events. On September 10th in Paris, you just successfully hosted the PRI in Person, which is the leading global conference on responsible investment. So, what can you tell us about this year's event, as well as the latest trends, practices and factors in the field of responsible investment?

　　MARTIN SKANCKE: The PRI event is an annual event. It's our annual conference. It went over three days. This year, we have a record number of participants, 1,800 investment professionals from our signatories, and the signatories to the PRI are asset owners, investment managers and service providers. So we really discussed a whole range of responsible investment issues. But I think, if I were to mention only one issue, it must be the climate change and energy transition, because there are many investors now realizing that this change in the energy system that is going to happen over the coming decades is a very significant issue for investors, and investors need to understand the implications of the energy transition for their investments, so we had very many panels and discussions that looked at this issue from different angles.

　　I think another obvious trend was that we need a more structured dialogue between investors and the companies they invest in. And I think we did a change this year, we invited more companies, more corporates, to our conference. Earlier the PRI conferences had mainly been about investors discussing with other investors, but now we brought more corporates into the dialogue to make sure we have forum where investors and corporates could have a meaningful discussion about issues like climate change and what that means in terms of risks and opportunities.

　　China Has Been a Leader in Green Finance

　　SINA FINANCE: Just as you said, more and more countries joined the PRI. As we know, developed countries like Norway have long been practicing the concepts of sustainable development and responsible investment. Here in China, the ESG-related topics such as environmental protection, social responsibility, and corporate governance are also becoming more and more significant in the business world. From your own observation, have you noticed some of the progress China is making in the field of ESG? And based on your tremendous experience working with developed nations, what suggestions would you give to a developing nation, like China, on the subject of sustainable development.

　　MARTIN SKANCKE: Oh yes, I mean China has been a leader in green finance and there has been very strong policy signals in China as well, so I think in the whole area of green finance, China has been a leader.

　　If we look at the PRI activities, we have grown significantly in China, more than 30 financial institutions in China are now members of the PRI. I think what we still would like to happen is more engagement from large asset owner institutions by asset owners, I mean like pension funds, insurance companies, and not just the investment managers. So I think what we see in China now is that many investment managers are engaged in this issue, but primarily because they are facing interest and demand from their international clients.

　　International investors who use Chinese investment managers ask their managers to look at environmental, social, governance risk factors in their investments. But we also need a stronger asset owner community in China, as well as stronger policy signals to encourage the asset owners to have a more structured approach to these types of risks, because I think it's important to remember that responsible investment and ESG integration is not about giving up returns, it's about managing risks in a better way. A lot of these environmental, social, governance risk factors are actually very significant risk factors for investors, and they are risk factors that investors need to understand in order to improve returns on their investments.

　　PRI Roadmap for China: Building the Community of Asset Owners and Strengthening Policy Signals

　　SINA FINANCE: And based on your tremendous experience, do you have suggestions to a developing country, like China?

　　MARTIN SKANCKE: So the PRI has tried to develop what we call roadmaps with concrete suggestions for a number of countries, we published a roadmap for China last year. And I think there're two main areas that we focused on, one was building this community of asset owners and trying to get more asset owners engaged. It's not sufficient to have only investment managers engaged based on demand from outside investors, there has to be a community of local asset owners who encourage the adoption of the practices. And the second area we looked at was how the policy signals from the regulators can be strengthened to encourage more asset owners to take these risks seriously.

　　PRI's Main Mission Is to Collect Good Experiences and Share Them

　　SINA FINANCE: You just said that you want to build a community that more companies can join, and we know, more than 2,500 institutions worldwide and more than 30 companies from China are now members of PRI. Do you have any suggestions for these companies or the investors?

　　MARTIN SKANCKE: So the PRI was set up in 2006, and we were set up really to help promote responsible investment practices, meaning good integration of environmental, social, governance risk factors by investors. We are not a regulatory body but a forum for co-operation and learning between investors. So our signatories, as I said, are asset owners, investment managers and service providers. We try to bring them together so they can learn from each other. We discuss relevant topics, climate change is obviously one of them, but there are lots of other issues.

　　We've done a large project on water risk, because access to water is becoming a risk factor for very many businesses, for instance, in the agricultural supply chain. We try to look at different risk areas and we try to develop tools and good case studies that investors can learn from. So I think our main mission is really to try to collect good experiences from across the world and share them with our signatories.

　　Understanding ESG Factors Can Help Investors Make Better Investment Decisions

　　SINA FINANCE: From your opinion, what can ESG bring to the companies? And how responsible investment could help companies grow healthier?

　　MARTIN SKANCKE: So I think there are many perspectives on this, I think one of them is the risk perspective, and that's an important perspective, because understanding environmental, social, governance factors will allow you to understand the risks you are facing in a better way and incorporate that in your decision making.

　　Climate is one example of huge risk factors. We know that we have to make a transition to a low carbon economy. We know that that transition process can be challenging, but it also involves lots of investment opportunities. By understanding the mechanisms behind the transition process and how it's likely to play out, it's easier for investors to understand how they can make good investment decisions in a period where the world economy will have to go through a very significant change with respect to its production and use of energy. So, I think it's not only a way of understanding risks but also a systematic way of understanding investment opportunities.

　　The global politicians have established the so called sustainable development goals, which is a set of areas that human kind has to solve, and we set a deadline for ourselves to reach the sustainable development goals by 2030. So the sustainable development goals will require lots of private sector investments, and these investments will come from institutional investors. Institutional investors should understand how the sustainable development goals can be a source of investment opportunity, and this is an example how broad understanding of this area can help investors make better investment decisions.

　　Different ESG Reporting Frameworks Need More Convergence

　　SINA FINANCE: Our team have been closely following the remarkable rise of ESG overseas. Through our news coverage, we noticed that more and more multinational corporations are keenly eager to increase their ESG ratings based on rating methodologies from MSCI, FTSE Russell, and other international rating agencies. On the other hand, we have also received feedbacks from companies in China, many of which expressed their concern over the compatibility of international rating methodologies with the local business environment, I guess the core question would be: is there a need for a set of China-specific metrics of ESG?

　　MARTIN SKANCKE: I think you have to remember that all countries are different in various ways, but the underlying environmental, social and governance issues are often the same. What I'm talking about are issues like water risk or climate change.

　　It's important that we have comparability between countries as well. Capital markets are becoming globalized, if we have too much fragmentation of reporting standards, it will be very difficult for global investors to compare between companies, businesses and countries, so I think what we're seeing now is that investors are saying there are too many reporting frameworks in the world, and we need more convergence. We need to be able to understand and compare more across sectors. If you look at existing indices and rating methodologies, they are already industry specific and often market specific. So I think there is still some flexibility within the existing framework to address these type of concerns.

　　Finally, it's important to remember that ESG rating is not an end itself. It is one of many tools that investors have for understanding businesses. So it's important to think about corporate reporting in general; it is important to think about what kind of structured dialogue corporates have with their owners. ESG rating is just one small part of a much bigger picture.

　　Bringing Global Experiences out to Market Participants in Different Markets

　　SINA FINANCE: As one of China's leading financial media, Sina Finance is dedicated to providing comprehensive information to all investors in China. Just two month ago, on August 20th, we just launched our new ESG channel. As the first ESG-focused financial news channel in China, Sina Finance ESG channel is striving to become China's leading ESG platform and committed to providing timely, comprehensive and objective ESG contents to our millions of users. We are very much looking forward to working with reputable global institutions like PRI to promote the concepts of responsible investment and ESG in China. What would be your expectations on the role of local mass media like Sina Finance in accomplishing PRI's mission across the globe?

　　MARTIN SKANCKE: First, congratulate you on your new channel！ I think that's a very positive development. I wish more countries have dedicated ESG channels. But the PRI is really about sharing of good experiences and case studies, so I think for us it's very good to have an opportunity to collect global experiences, and then share them in the different markets through local news channels, so we really like to cooperate with local news channels across the world to make sure that we can take global experiences and make them relevant in different markets and bring them out to market participants in different markets.

　　We are now trying to do more with the PRI. We are spending more money on translation, so we can make it available in different languages including Chinese. And so, more and more material will be available on the PRI website in Chinese language, so that we can make better use of it in the local markets.

　　Making PRI Concrete and Tangible

　　SINA FINANCE: What do you think, based on your experience in PRI or responsible investment, about what the media, like Sina Finance, could provide to the responsible investment Movement?

　　MARTIN SKANCKE: I think everyone learns more if it is a concrete example. So making things concrete and tangible is the best thing to promote learning. And we try to do that at the PRI, instead of having lots of high-level, general documents, we try to make it concrete case studies. So I think what's very valuable is to go and talk to the investors who are actually implementing responsible investment practices and ESG integration. We should ask about their experiences and get the good examples, so that people can learn from each other. The best way to learn is to have a good example to learn from, and I think that's a very positive role for the media if they can identify these good inspirational stories that can give people the inspiration to do new things and to improve the way they work.

　　PRI Helps Companies Improve the Way They Do Their Businesses

　　SINA FINANCE: Based on our channel and our data, more and more Chinese companies want to join the PRI or become a part of the ESG data coverage, so do you have any suggestions for these companies?

　　MARTIN SKANCKE: So, I hope the PRI can be useful to them, and I think we can be. I think the PRI is really about learning. It's about helping companies improve the way they do their businesses, improve the way that they understand risks, and improve the way they manage environmental, social, governance risk factors.

　　We're doing a large project now, for instance, project on this whole energy transition. We're also thinking about what kind of risks that can happen when the whole world globally, over a few decades, transforms from predominantly a carbon-based, fossil fuel-based energy system to a renewable energy system. This transition process will require policy interventions, it's also related to technological change that represents not only lots of risks for investors, but also lots of opportunities.

　　We're now publishing some of these studies, and we are about to translate more of this material into Chinese. So I think when Chinese investors and asset owners in particular join the PRI, we can help them get access to lots of this material that will help them understand some of these risks. For instance, think about a life insurance company with a very long time horizon. If you're providing life insurance or pensions, your investment horizon is many decades and so obviously if you have a young person starting to work and starting to save to a pension now, that person will get pension payments in their retirement many decades from now and the value of that pension will depend on how you have managed these risks.

　　It's obvious that climate change is a type of risks that will play out over a very long time horizon, so I would say that particularly for asset owners, like life insurance companies, it's very relevant to understand these risks. The way that they handle investments in this long transition period will determine how many pensions they can pay out into the future. The good news is, the PRI provides lots of resources that these investors can use to manage these risks in a better way.

　　PRI Is Improving the Quality of ESG Reporting Standards

　　SINA FINANCE: We have many Chinese companies that have integrated ESG factors into their organizational process, but they either do not disclose such information or do not know how to disclose. Does the PRI have a roadmap for that?

　　MARTIN SKANCKE: We have a Chinese roadmap that focuses on regulatory action and asset owner involvement in responsible investments, I think this issue of corporate reporting that you're raising is extremely essential because if investors are going to make better decisions, they need to base those decisions on good quality data. There are indeed very many global reporting frameworks that have to do with responsible investment in some form or another, and I think what frustrates lots of corporates and investors is that there are actually too many frameworks. So we have said, the feedback from our signatories and our members is that they want us to work on more convergence of reporting standards, making sure that we can have fewer and more comparable reporting standards. So this is our priority going forward to improve the quality of reporting standards and to make sure that we can apply these more generally on a global scale.

　　Investment Views from the Designer of World's Largest Sovereign Wealth Fund

　　SINA FINANCE: We have learned that you designed the Norwegian Pension Fund, the largest sovereign wealth fund in the world. Relating to this experience, would it be possible to share with our audiences briefly regarding how a sovereign wealth fund makes its investment and what role would ESG metrics play in such decision-making process?

　　MARTIN SKANCKE: So, I don't think sovereign wealth funds necessarily are very different from other long-term investments, like life insurance companies. I think sovereign wealth funds typically are characterized by two things, first they need to take account of these longer-term risks. Secondly, they are typically very diversified. They own a little bit of everything.

　　If we talk about things that can affect the overall portfolio, for instance, local pollution, if a company pollutes a river, it can affect the access to clean water for another company further down the same river. But the sovereign wealth funds are diversified investors, or what we called the universal investor. We often own shares in both companies, so even if dumping toxic waste in the river is the cheap way for one company to handle toxic waste, it imposes a cost on other companies.

　　I think these large diversified investors are uniquely positioned to understand how company behavior can impose costs on the rest of society. As the sovereign wealth funds typically own a little bit of everything, there're much more concerns with more systemic issues. They are concerned with how the whole economy develops and not just how individual companies perform.

　　So I think it's a very useful perspective for an investor to have, because it makes them take a step back and think about what actions of a particular company are good for the overall economy. Are they good for the people? Are they sustainable over time? So I think it's a better way of looking at investments.

　　China's Market Reforms Strategy and Its Impact on ESG

　　SINA FINANCE: The Chinese government just released a strategy on market opening and reforms, where in 2020, the Chinese market will become much more open. What do you think of this strategy? Will it affect the ESG development in China?

　　MARTIN SKANCKE: I think more openness really means you have more global investors, more globalization, more ownerships from foreign companies, but also maybe more outward investments. This means that the international experiences are even more relevant, and I see this as a very positive development. Really, we have more internationalization and more cross-border investments, it also means that it's even more relevant to learn from each other.

　　As I said, China has been a leader in green finance and there's lots of interesting technology being developed. There're lots of things that international policymakers and investors can learn from is experience, so I think this policy of more openness is very inspirational and good.

　　Why Asset Management Companies in China Joined PRI

　　SINA FINANCE: Until now, there are about 30 asset management companies in China joined PRI. Do you know why they joined PRI? What do they want to get from the PRI?

　　MARTIN SKANCKE: So I think there may be different reasons. Obviously, most companies who join the PRI do that because they want to learn more, and PRI is primarily a learning opportunity. I think many of the investment managers have been inspired to do this by the clients that they have, for example, the asset owner institutions that have given the money to manage. Many of the asset owners that are our signatories, for instance, life insurance companies and pension funds, have a policy that they will only give mandates to investment managers who are also PRI signatories, which creates a strong incentive for many investment managers to sign up. We welcome this because it spreads responsible investment practices.

　　It's also healthy for the Chinese domestic markets to have more engaged asset owners, because local asset owners need to make sure that their investment managers are properly incentivized to look at these types of risks when they make investment decisions.

　　How PRI Principles Deal with Country-specific Circumstances

　　SINA FINANCE: There's one more question. You just said that the companies in PRI desire more comparable standard. Different countries have their own culture, economy and problems, yet PRI principles are built on the same standard for all the companies in different countries. What do you think about this?

　　MARTIN SKANCKE: Yes, there are some challenges obviously. But I think at the high level, you can apply uniform principles. One example of this is what's called a Task Force on Climate-related Financial Disclosures (TCFD). This was an international initiative with Chinese participation and participation from other countries. There were investors and corporates together making one framework, which is intended to be applied globally.

　　Of course, there's one uniform framework, but the actual reporting will be different depending on the circumstances in each country. So I think there are some challenges. If you look at regular financial reporting, we've also seen more uniform approaches like IFRS standards being applied in many different countries.

　　The underlying businesses will be different and they're in different regulatory regimes, but it doesn't mean that we cannot apply the same principles and structure of reporting. But of course, the content of the reporting will have to be different because the companies are different and countries are different.