Towards a relevant research agenda for responsible investment

In a recent article in the European Company Law journal reflecting on the arguments advanced by the proponents of (socially) responsible investment, Benjamin Richardson, Professor at the University of British Columbia and Canada Research Chair in Environmental Law & Sustainability, identified five main arguments that are routinely advanced in support of responsible investment. Broadly, these are:

• That responsible investment is a profitable alternative to conventional investment approaches.

• That responsible investment can alter the cost of capital of companies, thereby creating incentives for improved corporate behaviour.

• That responsible investors can influence corporate behaviour through the use of their formal rights as investors (e.g. voting) and through their informal influence (e.g. engagement).

• That responsible investors can develop or support codes of conduct or other voluntary initiatives that may contribute to improvements in corporate processes and performance.

• That responsible investors can influence public policy and regulation.Yet, a recent survey by Gunther Capelle-Blancard at the Sorbonne University in Paris and Stéphanie Monjon at the CIRED, International Research Center on Environment & Development in France, which looked at the academic research on socially responsible investment, offered the following assessment: “…most of the papers on SRI focus on financial performance… most of the studies used follow roughly the same methodology and obtained very similar results”. They also noted that “…few of them [i.e. articles on SRI] … are concerned with ethics, altruism or moral values”. There is a striking disconnect – as Richardson also acknowledges in his article – between what responsible investors specify as the rationale for responsible investment, and the areas where researchers have decided to focus their attention. This disconnect is not particularly surprising. It reflects the availability of quantitative data (on fund performance, on aspects of companies’ ESG-related practices and performance), and the paucity of data on other aspects of responsible investment. It also reflects the common tendency of researchers to, as Capelle-Blancard and Monjon argue, ‘over-analyze data’. As an aside, this over-analysis rarely extends to any sort of critical interrogation of, or scepticism about, the quality of the data or the uncertainties in the data being used in SRI research! It also reflects a wider bias in the academic literature towards quantitative studies over qualitative or descriptive studies. Yet, as has been discussed at length on Responsible Investor, the financial performance of

responsible investment is just part of the picture. It is equally if not more important that we analyse and reflect on the contribution that responsible investment has made to improving corporate behaviour and to the functioning of the capital markets, that we understand how these changes have been effected, and that we properly understand the strengths and weaknesses of responsible investment as a strategy for delivering sustainability.

What is the contribution of research?

So, how do we make progress? What is the contribution that academic research could make to this discussion? Most important perhaps is to understand the contribution that responsible investment makes to improved corporate practice and the relative merits of different responsible investment approaches to the delivery of these outcomes. Put another way, researchers need to spend much less time on proving or disproving the investment case for corporate responsibility and, instead, focus on the wider contribution of responsible investment to sustainable development. Within this, some questions that could usefully be explored are:

• How does responsible investment impact on the structure (by asset class, by sector, by company, etc) and characteristics of investment portfolios?

• What is the evidence that responsible investment influences the cost of capital for companies?

• How have investors (through engagement, through voting) influenced corporate performance on environmental and social issues?* What influence have investor-backed initiatives such as the Carbon Disclosure Project had on corporate practices (e.g. management systems, reporting) and on performance?

• What is the evidence that improved corporate practices and management systems result in better social and environmental performance outcomes?

• How have collaborative initiatives influenced the practices and performance of investors and of companies?

• What influence have responsible investors had on public policy?

What is the role of investors?

Of course, researchers’ ability to carry out this type of research will depend on the availability of robust information from investors and from companies. Investors therefore have three critical roles to play in catalysing this research. The first is to make it clear that they have seen more than enough studies on the financial performance of SRI funds and of correlation studies seeking to link ESG factors and investment performance. The second is for investors to open up their data and their analysis so that researchers can understand what exactly it is that they do. The forthcoming PRI Reporting Framework offers an important starting point as it will encourage PRI signatories to disclose their objectives
and approaches to responsible investment, the resources that they have allocated, the types of engagement they have carried out and so forth. However, there is a need for investors to go beyond this. PRI is likely to allow significant discretion in terms of the level of detail that is reported and in the specific cases and examples that are presented. There is a case for the leading responsible investment organisations to try and go further and provide a more coherent account of their activities and what they see as the performance outcomes and changes that they have effected. The third role is to press companies to improve the data that they report. Notwithstanding the comments above, there would be clear value in robust studies that test the link between corporate responsibility performance and financial or investment outcomes. At present, the limitations in the data being provided by companies are such that these studies really cannot be considered to have particular validity or utility.Of course this article challenges both academics and investors. Academics will inevitably be wary of suggestions that their research be oriented away from areas that are publishable (or likely to be favoured by academic publishers), to instead focus on areas that are strongly focused on the needs and interests of practitioners. Similarly, most practitioners are likely to resist the idea that their practices and processes should be subject to the type of rigorous scrutiny that academic researchers bring. However, with responsible investment an increasingly mature segment of the investment industry, it is important (and timely) that we examine whether it has, to date, delivered on its promises of improving the corporate responsibility performance of companies or whether (and how) it might deliver on this promise in the future.

Dr Rory Sullivan is an internationally recognised expert on corporate responsibility, climate change and investment-related issues. He is Strategic Adviser, Ethix SRI Advisers and a Senior Research Fellow at the University of Leeds.

• References

Gunther Capelle-Blancard and Stephanie Monjon (forthcoming), ‘Trends in the Literature on Socially Responsible Investment: Looking for the Keys Under the Lamppost’, Business Ethics: A European Review, Volume 21, Issue 3, pp. 239-250. A pre-publication version of this article is available at:
Link to paper

Benjamin Richardson (2012), ‘Are Social Investors Influential?’, European Company Law, Volume 9, Issue 2, pp. 133-140.