Has fear driven ESG considerations dangerously beyond the financial?

The reaction of some investors is leading to irresponsibility.

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Over the past decade, I have seen a dramatic acceleration in the pressure on institutional investors to become more responsible, but the reaction of some is leading to irresponsibility.

All kinds of issues – seemingly only restricted by imagination – are now presented as relevant for investors by different stakeholders. However, many of these new requests have very little, if anything, to do with investment as normally understood. Investors are being asked to attend to purely political, moral or ethical considerations with a reference to responsibility in investments. The set of ESG issues deemed relevant for investment decision-making seems to have become a miscellany of everything disparate stakeholders might think of and lobby for. Therefore, it is increasingly important to differentiate between those ESG issues that investors may deem material to their investment policies as a contribution to longer-term returns and the issues investors would like to build into their investment approach for other, non-investment related reasons.

The set of ESG issues deemed relevant for investment decision-making seems to have become a miscellany of everything disparate stakeholders might think of and lobby for.

Despite the relatively strict regulation of our industry, there is in most jurisdictions enough flexibility for the development of ESG strategies suitable for each investor. Therefore, there should also be room to incorporate political, moral or ethical views, if desired and consistent with the interests of the beneficiaries or clients. Investors who choose to build these views into their portfolios tend, though, to place them under the umbrella of responsible investment. I think this approach is misguided and potentially dangerous. Since when has one kind of political view become more responsible than other, if one should at all link political views with responsibility?

Generally, as timeframes lengthen and their awareness grows, we can expect investors systematically to assess which ESG issues are material for various geographies, sectors and companies. However, as they start adding issues outside this analysis of materiality, the picture on what responsibility in investments is about, is starting to blur with unpleasant consequences – not least for the investors themselves.

Under pressure from NGOs and other lobbyists, some institutional investors are starting to define their own political, moral and ethical views as relevant for investment decision making, confusing theirstakeholders and putting their peers in a bad light for having unstated or different political, moral or ethical views.

This is leading to ever lengthening exclusion lists and a diminution of impact through stewardship. Can this behaviour be called responsible? All of our actions have motivations and it is worth our considering the real, underlying motivations for such investment strategies. We are now asking investors to do more than simply comply with the legislation and deliver the highest possible returns. They are also asked to keep the entire outside world happy, independently of whether it makes sense from an investment point of view. In some places, ESG has even become a competition parameter, most likely because that is the only angle of investment most stakeholders have a view on – at least when asked directly.

This puts investors under huge pressure. The natural way of acting under such stress is avoiding the unpleasant issues rather than accepting them, embracing them and trying to find a meaningful outcome. The motivation for some investors’ actions within responsible investment seems too often to be fear – fear of being criticised by their stakeholders and NGOs, fear of being exposed to the media, and sometimes maybe even fear of losing their jobs. All that together leads to a fear of being exposed as a failed and irresponsible investor. Firstly – it is not a healthy state of mind to be in – investors are humans, after all. Secondly – the increasing requirements on investors are here to stay. Hiding away or panicking and giving the activist stakeholders what they want, crossing fingers for it to be the last thing they ever ask for is not a sensible solution for a long-term investor. We are at real risk of wholesale exclusions from our portfolios, dictated by minorities.

If you as an investor wish to have political, ethical or moral views – so be it. But, state these views clearly and most importantly separately from your investment policy. Responsibility within investment is primarily about integrating material and risk-related ESG issues in investment decision-making. Political, ethical and moral views in isolation are not the ones that lead to sustainable portfolios.

In all aspects of life, we achieve better results by acting out of our will to succeed rather than out of a fear of failure. Therefore, I would like to invite investors to help themselves by taking a stand, developing clear policies and creating an environment in which investment strategies are created out of a desire to make a contribution rather than out of a fear of being criticised.

Zaiga Strautmane is an independent advisor on responsible investment. She is formerly Head of ESG, Compliance Officer and lawyer at Unipension in Denmark, now known as MP Investment Management, a founding board member and Vice Chair of Dansif and Chair of the Client Advisory Board at Hermes EOS.