Five ways to raise your RESPONSIBLE investment game

The UN Sustainable Development Goals (SDGs) offer of an ambitious yet realistic change agenda for people, planet and prosperity, which seeks to transform our world by 2030.

But how do we go about stemming catastrophic climate change, alleviating poverty and hunger, achieving universal equality, cleaning up our seas and achieving a more peaceful coexistence?

I see responsible investment being one major component of the transition towards this 2030 ideal, as it offers a way to reorient capital flows to a more sustainable economy, one that considers positive and negative externalities.

Disregarding externalities

As Al Gore tells us in this video, we know that the maximisation of short-term shareholder value without regard for so-called external factors, or “externalities”, as the environment and society is an outdated concept of fiduciary duty.

And yet it is still widely entrenched. A private WhatsApp conversation last year confirmed my fears that – putting aside the many reported failings of large corporations to act in the interests of the people (even Lehman Brothers had a page on sustainability in its 2007 annual report, hailing its role as an environmentally conscious “global corporate citizen”) –  a CEO of a privately owned or private equity-backed SME business is still under huge pressure from shareholders to deliver short-term profit at the expense of purpose-driven social issues that affect other stakeholders and society-at-large, now and for generations to come.

As a recent FT article so aptly summarises it:

“The pursuit of returns to companies’ owners at the expense of other stakeholders has undoubtedly led to greater profits, generating enormous wealth for investors and the executives whose rewards have been increasingly tied to shareholder returns. But it has come at a cost to employees, customers and the environment; incentivised boards to pay less tax; […]; and […] eroded the trust on which companies ultimately depend.”

Positive indications

While this may be the status quo, change is rapidly gathering pace.

Consider these three facts:

1) The SDGs are a globally agreed sustainability framework, that were signed by 193 member states. Meaning they should have considerable pull.

2) Today, more than $1 in $4 of professionally managed assets have sustainability mandates, making up a total of nearly $22.9 trillion.[1]

3) The Paris Agreement’s central aim is to keep global temperature rise this century well below two degrees Celsius. And, in connection to this, by 2030, the EU has committed to cutting its emissions by 40% compared to 1990 levels.

Adapting to change

Commitments by governments, corporates and investors have substantial ramifications on companies’ business activities in general and require a major reallocation of capital. These commitments suggest that there is a clear business case for responsible investments as drastic changes are required.

To open up to these investments, companies will require a more environmentally-conscious approach to doing business, taking all stakeholders in to account, including future generations.

Take mining as an example. Mining is an industry that is often considered to hold significant negative externalities. To benefit from future investment opportunities, mining companies need to ensure that the SDGs framework is integrated into the overall strategy. In areas, such as South America, where water stress is a key issue, transparent reporting on the negative impacts of factories in those areas – including the actions taken to address the issues – must be evident.

This approach involves business seeing itself as part of a larger system where negative externalities are considered in order for all of us to move towards being positive contributors to our ecosystems.

As Harvard Business School’s Joseph Bower and Lynn Paine have written, businesses must recognise that they “are embedded in a political and socioeconomic system whose health is vital to their sustainability”.[2]

How can you invest responsibly?

For this approach to work, the investing public – you and I – and the fund managers that control our investments, must practice an updated concept of fiduciary duty, which considers the broader picture, and invest responsibly.

Here are five pointers that can help to raise your responsible investment game.

• Read the sustainability reports

Of the world’s largest 250 corporations, 93% report on their sustainability performance and 82% of these use GRI’s Standards to do so.[3] You can use these reports to better understand how these companies’ activities minimise negative externalities and integrate social impact.

But, of course, you don’t have to trawl through thousands of corporate sustainability reports. New platforms are emerging, as are tools that show real impact. WHEB Asset Management has one such tool. WHEB’s Head of Research and SustainAbility Council Member Seb Beloe, believes that, “We need to shorten the distance between people and their investments”. He is optimistic that, “The next generation of investors will be much more focused on where their money is going, and new platforms will help them to see this”.[4]

“Many mainstream asset management firms are founded on the principle of passive ownership and have made a virtue of this approach – letting companies get on with business. This, of course, can be helpful in taking a long-term view. But at a such a critical point – especially in terms of climate and the Paris agreement – passivity is arguably the last thing we need. Instead, we need more in the way of activism from the long termists!”

Radar Sustainability article.

• Look for companies and portfolios that pay their fair share of taxes.

“In this world nothing can be said to be certain, except death and taxes.”  Benjamin Franklin.

While at least one half of this quote may still ring true, in this day and age we cannot be certain that all companies are paying an appropriate amount of tax, or any at all.

The most practiced form of addressing negative externalities is through tax. But the many loopholes, which can often ironically be found in regulations that are supposed to reduce inequalities, are being exploited to avoid tax payments.

And while companies should not shoulder the full blame because they are at the mercy of an outdated tax system, we should be able to rely on them to take responsibility to pay their fair share of taxes in a rational and transparent manner.

The good news is that you can easily look for these companies. Labels exist!

• Seek out ESG analysis

The Principles for Responsible Investment (PRI) – an independent, non-profit entity, supported by the UN – defines responsible investment as, “An approach to investing that aims to incorporate environmental, social and governance (ESG) factors into investment decisions, to better manage risk and generate sustainable, long-term returns.”

A movement that started more than 20 years ago has now moved into the mainstream. There exist different terms for responsible investing, although the industry seems to lack consensus on what these terms stand for. Suffice to say, screening and/or integration of ESG investment risks is now firmly established in the industry with funds that deliver measurable sustainability impacts alongside leading financial returns.

Monitoring overall ESG risk within the portfolio, for instance by measuring the portfolio’s carbon footprint, is one way to boost the earnings of companies that are investing to minimise their negative externalities.

• Ask the right questions

Common stock ownership always carries voting rights. The nature of influence differs from company to company, though shareholders typically have the right to vote in elections for the board of directors and on proposed operational alterations, such as shifts of corporate aims and goals or fundamental structural changes.

Take time to understand the extent of voting rights you have as a shareholder. If possible, ask the sort of questions that encourage transparency and responsible action on some of the issues I’ve already brought up, for example:

• Has the company considered publishing a tax policy?
• Would the company consider publishing information on revenue, profits before tax, tangible assets, employee numbers and taxes paid at the country level?
• What is the company’s stance towards reporting on ESG indicators?

It’s equally as important to ask your investment advisor about responsible investments. The more apparent to fund managers it is that there is more demand in this growing market, the more the supply of responsible funds will grow, the more transparent the market, in general, becomes, and the quicker responsible investment becomes the norm.

• Seek financial return!

Maybe you didn’t see this one coming?

According to PRI, responsible investment can and should be pursued even by the investor whose sole purpose is financial return because, it argues that, “to ignore ESG factors is to ignore risks and opportunities that have a material effect on the returns delivered to clients and beneficiaries.”

Crucially, this involves avoiding short-term investments, which incentivise quarterly performance-chasing and all of the associated short cuts, disregarding the fundamental value of companies.

 

Being in the current state it is, the finance industry does not yet provide enough incentive for responsible investment. Although change seems to be afoot, it can be catalysed by collective activism – similar to the five pointers above – through which individuals and funds can assert themselves.

According to Investopedia.com, “about 30% of investors currently own responsible investments and of those who do not, nearly half plan to start soon.”

With a real effort at culture change, more activism and a shift in focus, the UN’s 2030 Agenda can be achieved, but until responsible investment becomes the norm, we may still be some way off transforming our world and solving those most pressing issues.

 

[1] https://radar.sustainability.com/issue-19/reading-list-the-tipping-point-in-sustainable-finance/

[2] https://www.ft.com/content/a84647f8-0d0b-11e9-a3aa-118c761d2745

[3] https://www.globalreporting.org/information/news-and-press-center/press-resources/Pages/default.aspx

[4] https://www.linkedin.com/pulse/money-talks-time-shout-rob-cameron/