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RI thought piece: Fixing the ‘plumbing’ problems of SRI research

RI thought piece: Fixing the ‘plumbing’ problems of SRI research

The problems in SRI research are system rather than policy issues.

In April, Professor Jem Bendell wrote an article in Responsible Investor outlining 9 flaws in ESG analysis and ratings Link and highlighting five fixes. In an article on RI last month, I disagreed with almost all of the flaws that he identified, suggesting that they would drive SRI into a niche.
 In this second article, I argue that problems that do exist in SRI research are plumbing problems that require practical solutions by the industry rather than policy flaws requiring external intervention. In his article, Professor Bendell highlighted a five point agenda for improving SRI analysis. It is these fixes rather than the imagined flaws that really worry me. My objections to these fixes are:

  • Fix 1: New training
    My response: Training is more likely to alienate than educate mainstream analysts and will create unnecessary barriers for junior analysts
  • Fix 2: Codes of conduct for SRI research
    Response: The dead hand of such bureaucracy will not help an already over-conscientious industry.
  • Fix 3: Open-source analysis
    Response: Ill-considered collaboration has caused too much damage in SRI already; commercial competition and the promise of financial return is needed to stimulate investment in high-quality research.
  • Fix 4: Higher revenues for code-abiding analysts
    Maoist!

  • Fix 5: New regulation and government funding to guide practice
    An SRI GRI run by the PRI. Anyone?

I believe that the fundamental positioning and approach of SRI research is robust and healthy. The techniques and strategies used are sound and offer a wide range of choice to investors with all levels of financial and sustainability requirements. And the industry has found a hugely constructive middle way between the expectations of sustainability activists and the capabilities of companies. The direction and pace of travel towards further integration with mainstream investment analysis is good. However, the SRI industry’s ‘plumbing’ is blocked in a number of places. The flows of information, analysis and money around the industry are complicated, distorted and inefficient. This hinders the majority of committed, intelligent and principled analysts SRI analysts from doing their jobs as effectively as they might and limits the sustainability effect of SRI. It is perhaps unsurprising that the SRI industry’s information and financial flows are inefficient and even blocked. The industry is young and has been fragmented on national lines. Young industries naturally reach for the security of regulation, policy initiatives and collaboration for confidence, rather than allowing the market to shape their direction. SRI is also popular and everyone wants to weigh in and shape its development and social effect. Furthermore, sorting out the basics is in everyone’s interest, but in no-one’s specific interest. It is a classic ‘tragedy of the commons’. However, as the industry emerges from tunnelling through years of resistance into the light of widespread global acceptance, the positive benefits of fixing the plumbing become clearer as does the inevitability of doing so.

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