Late last year, Wolfgang Engshuber, Chair of the United Nations Principles for Responsible Investment (PRI), told Responsible-Investor.com that, in terms of the development of the PRI: “the honeymoon is over.” Engshuber was correct, but he could have been describing the entire movement for responsible investment (RI) as well. For the movement to fulfill its crucial promise, it must be recognized that the hard work has just begun. RI is in its early years of the marriage of investment “value” and “values.” It is an alliance of partners with different backgrounds. Like in any good marriage, the caring inspiration that kindled the courtship must be retained if the marriage is to succeed. The needs and contributions of each partner must be respected and continually refreshed. Every time I attend a gathering focused on responsible investment and environmental, social and governance concerns, I am constantly reminded that the people drawn to this area, especially the young people, are there because it fits their values. This often joyful sphere of activity is a place in which one can join with others to be part of something good and to make a living. The articulation of values that attracts this crowd provides the energy and the raison d’être for RI. However, the responsible investing movement is quickly approaching an inflection point as the mainstream value side threatens to suffocate itsvalues partner. Put simply, RI has the potential to merely become a style of investing. Academic evidence mounts that ESG investing can add value to the portfolios of investors, large and small. But the nature of the research is quite similar to that which underpins arguments for value or growth investing. While being merely a style of investing is not a terrible thing, it will mean the promise of RI has been lost.Indications abound that the values component is being shortchanged. In the recent MSCI/Responsible Investor roundtable featured in Responsible-Investor.com, a representative from MSCI outlined the direction, saying, “When you’re talking to the traditional, mainstream investment community, you need to be clear that there’s a way of approaching ESG integration that has pure financial motivations.” While this may be true for those attempting to sell to Wall Street and the City, if one must fit ESG within the values of contemporary finance that have brought the world to the brink of ecological and social mayhem, what is the point? If ESG becomes a value-less style of investing then the passion and fresh optimism that characterizes the best and the brightest in ESG and RI will evaporate as well. Another example can be seen in the decision of the PRI, an asset owner-led organization at its outset, to place service providers on its board. This move is problematic, though understandable financially and
institutionally. Certainly service providers are an extraordinarily important part of the RI matrix. But, as recent redundancies in the RI investment business show, they have internal constraints which require them to think about their business first as they do their RI work. It is not a bad thing that these providers see asset owners mainly as customers, but it must be recognized that this creates a bias that should not be ignored. The default in this relationship is value, not values. Inattention to values can even be seen in attention to the environment, the arena in which considerations of values are most robust in RI. Important research is being produced in academic centers around the world that defines and refines the business case for progressive approaches to the environment and climate change. But the business case alone is not enough. Jim Hansen, the former NASA scientist and environmental campaigner, was recently awarded the prestigious Edinburgh medal for his contributions to science. In his acceptance speech he called climate change a “great moral issue” for the world, on a par with slavery. This means that even in the “E” of ESG, an area in which a business case often seems quite easy to make, the “moral” component of the issue must always be front and center. Morals may be messy and complex, but what is the real alternative to engaging with them?Within the question of values, it is in the underutilized area of the “social” that the ability of RI and ESG to be a worldwide force for good can most easily be measured. Some claim that the move from socially responsible investing to ESG contained an explicit understanding that the social would be downplayed in the future. The area was too contentious and too difficult to fit into the investment matrix, it was thought. But responsible investing without attention to the social is vacuous. It is in the social that investment can best play a role in insuring the long-term health of our global society. Sometimes responsible investors must sacrifice a little short-term return to insure that the employees of an enterprise or in a supply chain are able to maintain a healthy life that allows them to build a family and have time to contribute to their community so that investors will benefit in the long term. The trajectory of RI will be determined by the question of values. Keeping the business case in the frame of reference is mandatory, but truly responsible investment requires that the business case doesn’t crowd out attention to values. Fundamentally, finance is about serving society, and therefore serving people; not the other way around. Sustainable fiduciary duty and truly responsible investment requires no less than a marriage of equals: value and values.
Jay Youngdahl is an attorney, a Trustee on the Middletown Works VEBA, a UNPRI signatory, and a Senior Fellow at the Initiative for Responsible Investing at Harvard University.