Rob Lake: My response to The Investment Integration Project

Steve Lydenberg has a long and distinguished track record as a pioneer in the world of social investment (as it used to be called, at least in the US), socially responsible investment (as it is still sometimes called) and responsible investment (as it is now commonly called). As befits a field that has pushed back new frontiers of nomenclature every ten years or so in its development, Steve now brings us two new terms – ‘systemic frameworks’ and ‘investment integration’. The thesis is in principle elegant and simple: investors depend on various systems (financial, environmental, social) without which they cannot achieve their objectives, therefore they should act in ways that preserve the functioning of those systems, and develop ways to measure and assess their effectiveness in doing so.
The early signs of the approach The Investment Integration Project (TIIP) advocates can already be seen. The investment beliefs of a number of leading asset owners reflect the interdependence of financial returns and ‘systemic frameworks’ – e.g. PFZW (Netherlands), Local Government Super (Australia) and Washington State Investment Board (US). The extent to which investors now acknowledge the financial implications of climate change was amply demonstrated at COP21. Initiatives such as the Corporate Human Rights Benchmark, the Access to Nutrition Index and Farm Animal Investment Risk and Return are starting to push ‘social’ (and, although I know we’re not really allowed to use the word for fear of scaring ‘mainstream’ investors – ‘ethical’) issues closer to ‘systemic’ status.
A primary focus of most investor activity in these areas at present remains understanding and mitigating financial risk to the investor. Decarbonising portfolios is first and foremost about protecting the investor rather than stabilising the climate. Incentives to make direct positive contributions to reducing emissions have to come first and foremost from public policy (carbon pricing, renewables subsidies, etc.). For the vision of TIIP to be realised we will have to analyse carefully the balance of risk and opportunity for the investor inherent in each systemic framework issue, understand the
drivers behind each, assess the potential for investor action and the specific activities and tools needed to make it possible along the investment chain, and the gap between investor action and the necessary functioning of systemic frameworks that can only be bridged by public policy (e.g. to price externalities, mandate specific corporate and investor practices, etc.). The Sustainable Development Goals might provide an initial (long) list of systemic issues and objectives for consideration by the project.It is also important to analyse why climate change has achieved the salience it now has with investors, and the characteristics of the investors who have led the way on the issue. The science of climate change is undisputed. Its impact is global, and at its core it is ‘numerical’ – it can be measured in tonnes of carbon and parts per million. It ‘speaks the same language’ as numbers-focused investors. It has also been the focus of sustained civil society campaigning for many years, latterly targeting investors themselves. The strong financial case for action allows investors to position themselves as taking action for financial reasons while at the same time winning plaudits for social responsibility; and in some cases living out sincerely held institutional values. Responding to climate change – and to some extent other ‘systemic framework’ issues – is also strongly motivating for individuals within investment institutions, who find the gap narrow between personal values and the expectations of the 9-5 day job. Whether other systemic framework issues share these characteristics – and what can be done to move them in this direction – will be an important question for TIIP.
Allen White, in his response to TIIP, argues that ‘attention to deeper questions of purpose’ is needed regarding the purpose of investment and the financial system. I believe Allen is right and that some investors are starting to share this view. One leading UK CEO, Saker Nusseibeh, of Hermes Investment Management, has said, for example, that investors should ‘think holistically in terms of future wellbeing’. Investors referring to the interconnectedness of their returns with the financial, ecological and social system in their investment beliefs are reflecting the same thinking. And TIIP refers to asset owners who might attach priority to specific systemic framework issues – e.g. healthcare systems, for investors who provide healthcare benefits or who have beneficiaries in health professions. Here too we are seeing encouraging signs of investors aligning their investments with their institutional purpose and their members’ values – e.g. ABP, the pension fund for Dutch teachers, has made commitments to invest in education, while the Australian healthcare workers’ pension fund HESTA is targeting investments in health and community services.
True ‘investment integration’ will require the financial system to be aligned with the values and needs of society as a whole. This in turn requires an alignment of values and purpose along the whole of the investment chain – from beneficiaries or customers as the ultimate owners of capital, via investment institutions and those working within them, to investment portfolios. The Investment Integration Project is an important step forward in our collective thinking about how to achieve this.

Rob Lake is an independent Responsible Investment Advisor.

Have your say: comment on this response and the original article: ‘It’s time for investors to start reporting on both portfolio and systems-level performance at RI’s Linked-in site