investor's guide to commodities - PRI Signatory Extranet - Principles ...

10 The Responsible Investor’s Guide to Commodities3ASSET-CLASSOVERARCHINGCONSIDERATIONSIn the course of the project, several interviewed investors and stakeholdershave challenged us to reflect on this fundamental question: Are investments incommodities at all compatible with the concept of responsible investing? Aswe show in the following sections, each approach to investing in commoditiesinvolves a range of ESG issues that can, to a certain extent, be managed andmitigated. We do not see a fundamental incompatibility with the concept ofresponsible investing if certain best-practices and precautions are followed.Nevertheless, there are substantial differences between various types ofinvestments that do matter to responsible investors. The concept of responsibleinvesting relies on the possibility to analyse and actively mitigate ESGrisks (or manage opportunities) by selecting investments and/or being an activeowner. Because of the fungibility of standardised commodities, this is not possiblefor commodity derivatives and (in most cases) for physical commodities.Many responsible investors also see their role as contributing to the long-termstability/viability of financial markets and to a transition to a more sustainableeconomy. The table below outlines some of the large variations between differenttypes of commodity investments in this regard (see table below).On balance, investments in real assets or in the debt/equity of companiesprovide the greatest positive “ESG leverage” to investors and are best aligned tothe concept of responsible investing. Physical commodities are questionableand many institutional investors exclude them from their investments. Forcommodity derivatives, which are the most frequently used investment type, itis not easy to apply the concept of responsible investing and in this sense thealignment is not ideal. We nevertheless believe that responsible investors canplay a positive role in this investment market by following the best-practiceshighlighted in the next section.“Long-term oriented, responsible investorsshould invest in productive assets and steerclear from investments in derivatives orphysical commodities”—CIO of a Dutch pension fund interviewedin the course of the project