Following the near-collapse of the financial system and the descent into global recession, there has been some sense of potential transformation in the global order of things. A transformation that recognises the perils of short-termism, narrow incentives, and inadequate regulations to address externalities; a reformed global financial system; a new American administration with an appetite for social reform; an acceptance of the risks presented by inefficient use of the planet’s natural resources; a recognition of the shift in the balance of economic and, increasingly, political power from the west to the east.
All this was good news for sustainable investment. Not only would a new world order force companies to pay the price for ignoring their extra-financial responsibilities, as identified by environmental, social and governance (ESG) analysis, but long-term, sustainability research has been gaining credibility. It is increasingly being seen as a tool with which to try and avoid the investment black holes that the markets have witnessed in the last year.
Reluctant to change
But as governments, companies and individuals watch the dust of the credit crunch settle and all the bad economic news sinks in, the current picture seems to be one of hesitance and uncertainty rather than revolutionary reform.
Faced with the perceived threat of disgruntled voters and taxpayers, the decision makers seem to lack the courage required to take the necessary steps. In the UK, the ultimate conclusion drawn from the white paper on financial regulation is that most financial activities will continue to be permitted and multi-million pound bonuses will soon make a return.
In the US, the House of Representatives only narrowly passed a much watered-down version of the Waxman-Markey climate change bill, and the participants in the Major Economies Forum on energy and climate failed to agree on a figure that should be targeted for a reduction in carbon emissions by 2050. We saw signs of an impetus gathering behind the sustainable investment industry as it became apparent that existing financial accounting systems increasingly fail to record key aspects of a company’s true capital. Can we expect this impetus to fade away as everything returns to business as usual? We would argue definitely not.
Brighter outlook
There are many reasons to believe sustainable investment is still set to capitalise on the fallout from recent global events. The move away from final salary pensions, accelerating as a result of pressures from plunging stock markets, falling interest rates and increasing life expectancy, will mean more individuals are forced to take ownership of their own savings for retirement through defined contribution plans. It seems reasonable to expect more people will take a greater interest in where their money ends up as a result. Will people looking towards their retirement be content to see their earnings invested in companies that are ignoring their corporate responsibilities?
At the same time, there is clear evidence that pension fund trustees are making notable progress when it comes to sustainable investing. The UK Sustainable Investment and Finance Association published a report last month, which found that trustees of three-quarters of surveyed UK corporate pension funds now believe ESG factors can have a material impact on investments in the long term.
Asset managers assume a central role
The final piece in the puzzle is the role of the asset managers themselves. At the annual Principles for Responsible Investment event in Sydney in July, the UN Environment Programme Finance Initiative published a report by the Asset Management Working Group, of which RCM is a member. The report underlines how the world’s largest institutional investors have a central role in assisting the move towards a more sustainable global economy. It goes one step further to argue that institutional investors may even have a far greater legal obligation to incorporate ESG issues into their investment services or face “a very real risk that they will be sued for negligence” if they do not.
While legislation that encourages environmentally and socially responsible behaviour is now firmly on the international political agenda, reluctance to rock the boat remains. In the absence of ambitious regulatory reform, analysis aimed at ascertaining the long-term environmental and social viability and thus sustainability of a business, remains critical. Using the results of this analysis to question company management; to quantify the value creation potential of a company; to assess the sustainability of a business model; and ultimately to invest assets – the assets of every person saving for their retirement – sensibly and responsibly and in line with fiduciary duty, is an essential part of enlightened share ownership. Perhaps where forward-thinking, sustainably-min-ded individuals, asset owners, and asset managers go, currently fearful governments can follow.
Barbara Evans, sustainability research, RCM
