Can responsible investment move from process to outcomes on poverty and sustainable development?

Report of the Better Returns in a Better World project.

In November 2008, Oxfam launched the Better Returns in a Better World project with the aim of understanding how investors may play a greater role in contributing to poverty reduction and sustainable development. Among the central findings from the project were that many investors see poverty and development issues as falling squarely within the scope of their responsible investment activities. There is a clear appetite to engage with companies on their performance in these areas, and there is interest in building explicit consideration of these issues into investment research processes. Despite these very positive findings, we also found that most investors saw these issues primarily in terms of management systems and processes, rather than outcomes. For example, when we looked at the issues raised by investing in land in emerging markets, we found that most institutional investors concentrate their attention on the management systems and processes that companies have in place, rather than the social and development consequences (e.g. access to water, human rights) of these investments. The result is that these consequences are frequently excluded from investment analysis or the engagement that investors have with companies. This omission, in turn, raises the question of whether responsible investment will actually lead to better social or environmental outcomes in developing countries. Better management systems and processes should help companies better manage risks to the company, but it does not necessarily minimise the negative impacts or maximise the positive contribution that such investments can make. In many ways, these findings reflect the emerging debate among civil society organisations about the social and environmental outcomes that result from responsible investment more generally. That is, to what extent should responsible investment be about enhancing investment returns andto what extent should it also be about the social and environmental outcomes that are achieved? Moreover, if responsible investment is to be about outcomes, how best can this be achieved? From the more than 80 investors we interviewed and met with in the course of the Better Returns in a Better World project, a consistent message emerged: investors are more likely to take specific social issues into account in their investment decisions and engagement when there is a clear consensus around what the expectations of companies are. These investors stressed that internationally agreed frameworks on issues such as labour standards, bribery and corruption, cluster bombs and controversial weapons have helped simplify the process of integrating development issues into investment analysis and engagement, through providing clarity and certainty about the societal expectations of companies and through enabling company performance to be compared on an objective basis. The central conclusion from the project was that if we are to maximise the contribution that investors make to poverty alleviation and development, we need as a matter of urgency to develop and agree normative standards around particular social issues, with a focus on the outcomes that we expect companies to achieve. Issues that were identified as being of particular importance were: arms transfers (and expectations of the defence sector in general), the management of water in water-stressed and water constrained areas, covering issues such as access to water, human right to water, community engagement and long-term water planning, and access to land, specifically the manner in which issues such as food security, the right to food, land tenure, and access to water are addressed, and smallholders and local communities are involved in – and benefit from – decisions to purchase land in developing countries.

The role of investors in this regard is twofold. The first is to support the establishment of credible processes for the development of these frameworks and, when developed, to support the uptake and implementation of these frameworks. A case in point is the UN Arms Trade Treaty which is currently under debate; investors could potentially play a catalytic role in ensuring these proposals are adopted. The second is to build these frameworks into their investment research and engagement with companies. as we have seen with the debate around controversial weapons, it is possible for investors to build consideration of these complex issues into their investment processes (e.g. through screening out particular companies) and engagement (e.g. ensuring that the companies in which they invest are not involved in this sector). Responsible investment is at a critical juncture in its development. To date, the idea of ‘responsible investment’ has generally been supportedand encouraged by civil society organisations, on the grounds that it can make a positive contribution to the delivery of social and environmental outcomes. It is inevitable that the level of scrutiny will increase and investors will be required to demonstrate how their actions and activities actually contribute to meaningful social and environmental outcomes. That is, the outcomes from responsible investment will need to be described in terms of performance rather than process. The development of agreed normative frameworks is an integral part of this transition: it will allow investors to demonstrate that the actions that they are taking reflect and align with wider societal expectations around the role of investors. We do not underestimate the difficulties in developing these frameworks but we see their development as integral to the longer-term credibility and legitimacy of responsible investment.

Link to Better Returns in a Better World report:
Rory Sullivan is the investor lead and Helena Vines Fiestas the Oxfam lead on the Better Returns in a Better World project.