Over the past two years, we have worked with academics, LSE students and industry professionals on an edited book, Key Debates in Sustainable Investment.
Our starting point for this work was that sustainable investment is a significant part of the global investment market, with many institutional investors now incorporating sustainability issues into their investment decision-making and ownership practices.
While this growth has been welcomed by many, it also raises important questions, such as whether sustainable investment delivers superior financial returns, whether it is consistent with investors’ fiduciary duties, and whether it delivers better environmental and social outcomes.
These were among the critical questions that our book set out to explore. Across 250 pages, we and our contributors dissect the academic and practitioner literature to offer up evidence-based insights into a series of key debates at the heart of sustainable investment thinking and practice.
One of our key reflections from the book is that sustainable investment has, for all its potential, suffered from a lack of ambition and critical thinking about its own limitations. Investment practitioners have relied heavily on building a business case for action where the rationale has been defined by current norms and conventions, by investment “best practice” and by the spaces (or the permissions) provided by their organisations.
This business case, in turn, has defined which issues get prioritised (and which get ignored), what data and information are deemed decision-useful, and what weight is given to sustainability impacts and ethical values in decision-making.
Such a cautious approach was understandable when sustainable investment was transitioning from an ethical niche to a mainstream part of finance. However, we are now at the point where the analysis of sustainability-related issues is a standard part of investment analysis, investors routinely engage with companies and other actors on sustainability-related issues, and reporting on sustainability-related governance, practices and impacts has become commonplace.
Debates about sustainable finance often circle around factors such as data quality, legal duties, reputation, materiality and financial incentives.
These matter, and they fundamentally shape what is possible. Indeed, a key argument we advance in the book is that without greater government intervention to address market failures – such as the inadequate pricing of carbon emissions – investor action on sustainability will remain constrained.
Yet such factors should not distract from the responsibilities borne by individuals working inside the system. Those choices aggregate into organisational behaviour and, over time, into market norms.
It is against this backdrop that investment professionals need to proactively shape their roles and activities to ensure that they make a meaningful contribution at scale to positive social and environmental outcomes. In our opinion, all sustainable investment professionals need to:
- Critically reflect on their personal and professional goals. Practitioners need to be clear about why they are working in sustainable finance, and what they are trying to achieve. This involves defining what ‘success’ looks like. It also involves asking questions about whether and how their personal sustainability goals are aligned with public sustainability goals (eg, as enshrined in frameworks such as the UN SDGs or the Paris Agreement on Climate Change) and with stakeholder expectations. In a recent conversation at the Principles for Responsible Investment’s 20th anniversary event, Dr Stephen Barrie of the Church of England Pensions Board challenged all investors to use their moral imagination when defining and assessing the effectiveness and impacts of their work.
- Challenge the means. Practitioners need to ask whether what they are doing – in terms of, for example, their investment research and decision-making, their product offerings, their engagement, voting and governance activities – could plausibly contribute to substantive improvements in sustainability outcomes (eg, reductions in greenhouse gas emissions, nature positive outcomes). Practitioners need to be honest with themselves and be prepared to subject their theories of change and their assumptions to critical scrutiny.
- Be honest with themselves – and others – about what is working, what is not, and what has only marginal value, influence or impact. As well as celebrating successes, practitioners need to acknowledge challenges, shortcomings and even failures. Sustainable finance can be understood as a series of experiments. Some (eg, a new financing instrument or governance initiative) will make a significant contribution to sustainability goals, some will be partially successful, and some will fail. Facing up to shortcomings means understanding why interventions fell short, what would need to change and whether there is any realistic prospect of success.
- Take appropriate and effective action when things aren’t working. Appropriate implies measures which are proportionate. This may involve minor adjustments (“tweaks”) that do not fundamentally alter, say, the basic design of a financing instrument. However, proportionate action may require more fundamental change, eg pursuing very different sustainable investment instruments, initiatives and approaches when current ones consistently fail to deliver.
- Define what they – and their organisation – can do to effect substantive change. Different individuals and organisations (eg, asset managers, financial regulators) have different resources, capabilities, responsibilities and mandates. Practitioners need to think about how they can strategically deploy their strengths (eg, their convening power, their knowledge of decarbonisation strategies) to achieve the greatest sustainability impact. For example, which issues are they best positioned to address? Which can they tackle alone, which require productive partnerships, and which are already being effectively addressed by others?
- Engage with, and be accountable to, stakeholders. Finance professionals and institutions have responsibilities toward their stakeholders. These include their beneficiaries and clients, but crucially also include other actors (eg, communities, workers) affected by their decisions and actions. Understanding and acting on the sustainability preferences of stakeholders is important if sustainable finance is to be inclusive and address the economic, environmental and social aspects of sustainability. Accountability implies a need for organisations to publicly communicate their sustainability goals and policies and to be transparent about their sustainability performance (the good, the bad and the ugly).
- Acknowledge that sustainable finance has justice and equity implications. Practitioners should consider the distributional consequences of their activities. For example, do investments in renewable energy projects predominantly benefit wealthier groups, while negatively impacting poorer ones? Within this, it is particularly important for practitioners to ensure that sustainable financing addresses the needs of different groups, including disadvantaged groups in the Global South and Global North. Raising the bar on the ambitions of sustainable finance means that justice considerations – including questions of fairness and differential responsibility – should take centre stage in investment decision-making.
Our conclusion is that we are at a pivotal moment in sustainable investment. Sustainable investment practitioners need to be far more reflexive, self-critical and evidence-based in relation to their policies, practices and assessments. They need to ask questions, even uncomfortable ones, about whether what they are doing stands up to scrutiny and whether some practices are not working or cannot work.
Ultimately, we argue that investment practitioners need to ask themselves: “Is what I am doing going to make a real, positive and significant difference to advancing sustainability for current and future generations?”
In our view, this is the test against which we should assess our work, our careers and ourselves.
Dr Rory Sullivan is CEO of Chronos Sustainability and visiting professor in practice in the Department of Geography and Environment at the London School of Economics and Political Science (LSE).
Dr Richard Perkins is associate professor in the Department of Geography and Environment, LSE, where he is programme director of the MSc Environmental Policy and Regulation. He is also an associate of the Centre for Economic Transition Expertise (CETEx), LSE.
