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Reintroducing ethics to responsible investment

Reintroducing ethics to responsible investment

The delivery of better social and environmental outcomes seems to be being lost.

Responsible investment (and its earlier incarnations in ‘socially responsible investment’) was originally seen as a means of harnessing the capital markets (or the finance sector in general) in support of the goals of sustainable development. While there was – and remains – inevitable discussion about its precise objectives, at its heart responsible investment was seen as a way of minimising the negative and maximising the positive social and environmental consequences of investment practice. Responsible investment was not seen as an individual style or strategy but rather as encompassing a range of strategies, including engagement, voting, best-in-class, positive and negative screening, fundamental analysis, thematic investment and public policy. Yet, both of these points – that responsible investment has as its ultimate purpose the delivery of better social and environmental outcomes and that it encompasses a range of strategies – seem to be in the process of being lost. At conferences, in the investment press and in client presentations, responsible investment is primarily described in terms of the potential for the analysis of environmental, social and governance (ESG) issues to contribute to investment performance (‘the search for alpha’). In many ways this is hugely
encouraging: it should ensure that valuations properly reflect companies’ impacts on society and the environment, and it should send a clear signal to company management that these issues are seen as important by investors (and so need to be managed accordingly).

There are also benefits to those individuals charged with leading their organisation’s responsible investment activities; a strong focus on investment research may mean that they are seen as valuable by the organisation (in particular, by their investment colleagues) and it may strengthen their engagement with companies by enabling them to point to the investment relevance of ESG issues. Of course, it goes without saying that investment performance is important. Delivering appropriate risk-adjusted returns is a core objective for investors, and properly valuing ESG issues is widely seen as integral to delivering on this objective. However, the overwhelming emphasis on the financial implications of ESG issues raises critical questions about the social purpose of responsible investment. These include:

  • Does the focus on financially material ESG issues mean that issues that are not seen as financially material are seen as less important by companies and their investors?
  • Does the emphasis on investment research mean that resources are diverted away from company and public policy engagement?.
  • Does analysis of the financial implications of ESG issues result in portfolios that are more ethical or have better social and environmental characteristics than portfolios where these sorts of issues are not taken into account?

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