Economy

The principles of responsible investment – a short series. Principle one – analysis and decision-making.

Published

12 years ago

August 8, 2012

The first principle states that signatories “will incorporate ESG issues into investment analysis and decision-making processes.”

The first challenge with any responsible investment, whether as a fund manager or private individual, is to explore where we draw the boundaries on environmental, social or corporate governance issues versus profit. What is acceptable to one person may not be acceptable to another.

Put simply, it has not been possible throughout the long course of human history to draw up a commonly understood and widely accepted code of behaviour that governs our interaction with each other and the planet. The United Nations did its level best through the Declaration of Human Rights and various other conventions on climate and biodiversity. The various collections of simple principles are widely and regularly flouted by national, political, military, religious and business leaders. Why should we expect more from investment managers and investors?

But the establishment of principles is not simply the triumph of optimism and idealism over realism. It is in no-one’s interests, least of all investors, that the investments they make harm the potential for return on future investments. In many ways, our current economic malaise is a direct result of these principles not being adhered to by investors and those they invest in. Those who are now suffering from a decade-long flat-line in equities only have themselves to blame, for investing in companies that crashed the global economy and are now exacerbating the problem by pressurising national governments to cut spending. Maybe it is recognition of this that there was a rush to sign up to UNPRI after the 2007 crash.

Incorporate means ‘to contain or include’. Most major corporations’ Corporate Social Responsibility statements could be said to be incorporating ESG issues into investment analysis and decision-making. But highly paid analysts need to look further and deeper.

BP (Deepwater Horizon oil spill), News Corporation (phone hacking and bribing police), Barclays (multiple scandals), HSBC (money laundering) and Standard Chartered (alleged hiding of Iranian government billions) all look like weaker investment options today than they did a few years ago. With the most cursory analysis, most of these problems would have been identified as highly probable due to poor corporate governance (or by simply reading the back pages of Private Eye). Anyone who asserts that these organisations take their environmental, social or governance responsibilities seriously is paying lip service to this principle from the off. The Church of England finally sold its stake in News Corporation yesterday, as though the Millie Dowler phone hacking scandal wasn’t enough to make them question that investment over 13 months ago.

It seems that some investment managers, including those representing the established Church of England, glanced at the dubious ESG record of these organisations and then focused on the bottom line – will this make a solid return?

What is surprising is the human element in these decisions. Investment managers and investors are people. Most people who read and write for Blue & Green Tomorrow are one or both of these. People with values and morals, people who treat their families well and wouldn’t dream of damaging their local environment or community or cheating at anything. It is surprising therefore, that the person who walks towards an investment terminal leaves this moral person behind and thinks, “to hell with the environment, society and good corporate governance.” It is not enough to argue that it is the system that makes this happen. The system is made up of human beings making simple choices and decisions minute-by-minute, hour-by-hour and day-by-day. The person who decides to hold their position in News Corporation, long after the facts of their appalling wrong-doing have broken, is saying that hacking the phone of a murdered child is okay with them. No system can make a person do that. It’s a choice that has been weighted and measured.

Any sensible investment manager and investor will now be looking a lot closer at companies in their portfolio. The media scents blood in the business world, especially financial services, and the public is really angry. There will be a lot more disasters and scandals – the LIBOR rate fixing scandal hasn’t even started yet – and as we get closer to an election there will be ever greater pressure on politicians to act tough in national and in intergovernmental debates. Action will follow rhetoric or the public, egged on by the media and digital vigilantes, will punish the parties that don’t act.

Organisations like EIRIS provide an invaluable service in screening funds based on the companies they invest in, but relying on external parties is not enough. Institutional investors need to invest in more ESG training, research and analysis tools to ensure that the companies they invest in are living up to their ESG responsibilities. The fund manager is responsible and accountable as he is, in effect, part owner of the enterprise.

The next principle talks about the investor as an active owner and it is there we will go tomorrow.