The State of Responsible Investment
In theory, long-term shareholder interests are aligned with environmental and social good. How does this work?
Large institutional investors, most of them pension funds are, in effect, ‘Universal Owners’, as they often have highly-diversified and long-term portfolios that are representative of global capital markets. Their portfolios are inevitably exposed to the external costs of business. Corruption, for instance, could lead to a significant fine with a direct impact on a company performance, but it also raises the cost of doing business for all others. Unchecked carbon emissions raise questions on a company’s quality of management; it also contributes to climate change with increased financial risks for all.
Long-term economic value creation and the wellbeing of beneficiaries are at stake. Hence, long-term investors can and should act collectively to reduce financial risk from environmental and social impacts which means they have a responsibility to adopt an investment approach which considers sustainability issues.
Some investors have started to utilise a proxy such as employee safety. If we look at BP, this is a prime example where the safety record could have signalled future risk. Imperfect safety procedures in its US operations led to accidents and eventually the Gulf of Mexico oil spill that cost the firm tens of billions. Another more recent example is BHP Billiton, where shares hit a seven-year low after the Brazil dam disaster in November 2015.
How sensitive are companies (board and management) these days to sustainability issues in their business - how has this changed over the last 10 years?
Over the past decade, companies have started to think more intentionally about how to maximize shareholder value by exploring the complex interplay between financial, human, social and environmental return. Investments in better training, healthcare, for instance, have demonstrated direct financial returns through gains in productivity and efficiency. Support for social programmes has accelerated economic growth and raised incomes – creating a wider consumer base and easing entry into new markets.
Terms like ‘shared value’ and ‘triple bottom-line’ are now commonplace in board rooms around the globe. As a result, corporate social responsibility (CSR) is no longer conceived as a series of seemingly random feel-good grants, but as an essential tool that impacts a company’s philosophy and core business strategy including its brand value, market access, and operations.
This development is also supported by global norms and social initiatives such as the Sustainable Development Goals, more defined reporting and accounting frameworks such as GRI, IIRC, SASB or UNGP and encouraged by legislation, such as the EU Directive 2014/95/EU of non-financial and diversity information and the Modern Slavery Act, UK.
While it sounds like an ideal situation if all investors took a long-term approach to investing, it would seem that many still chase short-term returns and gains. What proportion of global investment really now takes into account ESG issues?
The global sustainable investment market has grown both in absolute and relative terms to US$21.4 trillion at the start of 2014 – equal to approximately 25% of all the world’s financial holdings.
Negative screening, integration of environmental, social and corporate governance (ESG) factors into investment processes and corporate engagement have been identified as the key investment approaches (for market growth and ‘impact’), in Europe and across the globe:
Overall, the definition of best practices in ESG integration is evolving very quickly. A few years ago, being a PRI signatory – where signatories pledge their support for responsible investment and incorporate ESG factors into their approach - was considered as advanced; it is now seen as a requirement for asset managers and, instead, the focus has shifted to measuring and benchmarking the effectiveness of ESG factors.
Women Advancing Microfinance UK is hosting a dinner on Tuesday 12th April in London on responsible investment, specifically looking at how we can influence the way global companies act and impact the world. Tickets to the event are available here. Would you like to know more? Come and join us at the WAM UK dinner.