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Comment. Steve Lydenberg: What is responsible investment without dilemmas?

We are asking many of the hard questions that those in the mainstream financial community are often all too quick to dismiss.

The recent debate in these pages about how responsible investment research and money management standards can be improved is a healthy one. We in the responsible investment movement are right to ask ourselves what it means to be doing the best possible job and how to get there from here. I fully agree with Professor Jem Bendell’s call for higher standards among researchers and money managers offering responsible investment (RI) services. In particular, it is crucial that training in the fundamentals of responsible finance be strengthened for those within the RI community. Similarly, it is vitally important to introduce RI into the curriculum of the academic community, which continues to ignore it almost entirely. I also find myself hoping that Mike Tyrell’s belief that unplugging the “plumbing” of the clogged markets for RI research and products will increase the resources needed to do an even better job. He is generally correct in observing that “the techniques and strategies used [by RI researchers] are sound and offer a wide range of choice to investors with all levels of financial and sustainability requirements.” But even the best of those currently in the field could be doing a better job—a job that when done well will exceed the breadth and scope of what mainstream analysts and investment-product providers currently offer. At the same time, while we are raising the standards and increasing the resources of RI, we should realize that there are dilemmas that are a fundamental part of our daily business. They may not be easy to resolve, but it is inconfronting these ongoing dilemmas that we have made the greatest progress in driving our field forward, progress that can bring about real change in how finance is conducted and ultimately, one hopes, in the creation of a more just and sustainable world. Anyone entering the RI field and thinking it will be easy must soon confront these dilemmas in one form or another. This is because we are asking many of the hard questions that those in the mainstream financial community are often all too quick to dismiss, such as:
• If investments can produce social and well as financial goods, how do we measure the former and compare them meaningfully to the latter? Such measurements are crucial to knowing whether responsible investments have been successful or not.
• If we believe corporations should respond to society’s demands that they behave responsibly when it comes to societal and environmental matters, how do we make sense of the huge variety of opinions among investors about what this responsible behavior should be? Resolving this tension is crucial to being able to serve responsible investment clients well.
• If it is reasonable to ask that corporations in our societies at a minimum obey the law, given the vaguaries of our legal and political systems—for example, out of court settlements, cases that drag on for years, corporations that influence the laws that regulate them—how can we know when they are actually doing so? Making such judgments is crucial to assessing the
strengths and weaknesses—the quality and ethics—of corporate management.
• If we want to raise our voices as stockowners and let corporate managers know how they can be doing a better job when it comes to social and environment affairs, will they take us seriously if we don’t at least threaten to sell their stock? Then again, will they respond at all if we actually do? Understanding how best to communicate with corporate managers in a diverse range of specific situations is crucial to acting effectively as a responsible investor.
• How we attract the attention of corporate managers to vital social and environmental issues where profits cannot be immediately realized or may even suffer—such as human rights violations in a country where they have only minor operations or when uncertainties arise over the environmental implications of a new, potentially profitable technology? Knowing how to balance issues of principles and profits is crucial for maintaining credibility with the business community.
• If we believe that companies can, and do at times, genuinely change for the better or the worse, how do we know definitively when that change has taken place or, conversely, when what we are looking at is no more than fluff or public relations spin? Judgments of this kind are crucial to the investment process and should not be eliminated from finance, which ultimately depends on good, sound judgment.
• If some goods and services are better provided by government than by the markets, or by the markets than government, how can we be sure which of these powerful forces is best used and under what circumstances?Grappling with the appropriate role of government in the marketplace is crucial for responsible investors if they are to acknowledge that investment decisions often have a political as well as a financial dimension that cannot be easily ignored. I still remember the phone call that I received from a stock broker when I was working with KLD Research & Analytics back in 1992. He had a client interested in something he didn’t understand or know anything about: socially responsible investing. Could we help? When I started to explain the field to him, he interrupted me: “Never mind about all that. Very interesting, I’m sure. But can’t you just give me the list?” What we’re doing is something far more important than coming up with a list of responsible companies or even offering a suite of responsible investment products. We’re trying to change the way we all—investors, consumers, employees, communities—think about how corporations interact with the world around them. We want to figure out how finance can have a positive impact in our daily lives and not cause, as it has recently, more problems than it has solved. As Amar Bhidé point out so well in his recent book A Call for Judgment, intelligent, sound investment decisions—whether they are loans by a bank officer or purchases of companies’ stock—depend on good judgment. Judgment is often difficult and good judgment acknowledges and grapples with the dilemmas of the real world. When we in the RI community are doing our job well, we confront these dilemmas, exercise our judgment and consequently contribute in a meaningful way to the ongoing debate about how finance can play a positive, stabilizing and productive role in society.

Steve Lydenberg is Partner, Strategic Vision, at Domini Social Investments. He is also co-author of the recently published Dilemmas in Responsible Investment:
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