The need to reboot responsible investment has never been more urgent. Unless we see immediate and significant action both to mitigate and adapt to nature loss and climate change, a cascade of catastrophic environmental crises is heading our way.
Already, people around the world are facing increased hardship due to more extreme and unpredictable weather.
The climate and nature emergencies are mirrored by a sustained social emergency characterised by insecure jobs, racial discrimination and levels of personal debt reaching worrying new heights. This is contributing to divided societies, health inequalities and falling life expectancy for the economically marginalised.
These social issues consistently get less time and attention from professional investors than environmental concerns. However, the wider investing public, especially working people who are enrolled in pension schemes, care about them at least as much, if not more. This is perhaps due to their own experiences of these injustices, or what they see happening in their communities.
People employed on the ESG beat within the investment sector have known about these mounting and inter-connected issues for years. But we are still seeing a failure to allocate or steward investment capital in a way that contributes to the resolution of these multiplying threats.
Certainly, we are not seeing the sector accept responsibility for its role in contributing to the problems that are exacerbated by deeply engrained behaviours in our capital markets.
Problems such as working people not earning enough to heat their homes or buy healthy food while many of the companies they work for post huge profits. Problems such as allowing companies to put us all at risk by prioritising business as usual over urgently-needed climate action.
It’s time for a bolder approach to responsible investment.
That’s why I’m proud that ShareAction, which has long campaigned to make investment institutions more ambitious and active as stewards of other people’s money, is today publishing a fresh definition of responsible investment.
We are asking investment institutions that choose to call themselves responsible to commit to “a transparent approach, embedded throughout the investment process, that takes the negative and positive impacts on people and planet as seriously as financial risk and return”.
This new definition expands beyond the investment sector’s current focus on the risks posed by social and environmental issues to investment returns.
It demands that institutional investors also address themselves systematically to the impacts created by the capital they deploy. In short, it proposes that responsible investors take responsibility for their effects on the world that their beneficiaries and clients live in today and will inhabit tomorrow.
For some years now, we’ve seen an increasingly ambitious policy and regulatory agenda in the EU, the UK and beyond to establish minimum requirements on fiduciary investors when it comes to assessing and managing environmental and social factors.
We warmly welcome this recognition from policymakers who design financial regulation that pension savers, retail investors and other consumers of financial services should benefit from more ESG-aware investment practice.
Minimum regulatory requirements have caught up with what was once an aspirational standard developed by pioneering actors in the global investment community nearly 20 years ago.
This creates the space for a more ambitious aspirational standard for those who want to call themselves responsible investors. Furthermore, our deepening understanding of the systemic nature of many social and environmental risks has made it clear that prudent fiduciary institutions should act to limit the negative externalities generated by the companies and assets in their portfolios.
Regulatory frameworks set the floor for responsible behaviour, not the ceiling. Authentic responsible investors should go well beyond that baseline in avoiding harms to our planet and its people.
So, what in practice does taking the negative and positive impacts on people and planet as seriously as risk and return look like? What does it actually demand an investment institution do?
Next week, ShareAction will issue the first of a series of technical guidance papers that will set out standards and expectations for responsible investment according to this new definition. These papers will be grounded in detailed analysis and research. The first in the series will focus on setting interim net-zero targets to drive deep decarbonisation.
This can no longer be the age of too little, too late. Let’s not wait until the last tree has been cut down, the last river polluted, the last fish caught and realise we cannot eat or drink the money we’ve secured along the way.
It is time for the investment community to use the power we endow it with to serve the public interest. We hope and believe this new definition of responsible investment will support that to happen.