Investing responsibly: Investors have power

Responsible investing is about more than doing good. It’s about securing long-term investment performance and mitigating risks by looking at investment, on more than just financial grounds. It focuses on three key areas that can make a difference to a company in the long term: environmental impact, social impact and corporate governance (commonly abbreviated as ESG).

It’s based on sound evidence. A meta-study conducted by the University of Oxford in 2014 concluded that 88% of research papers found a positive link between good corporate sustainability practices and stock performance.[1] Research conducted by MSCI in 2018 showed that companies with improving ESG credentials outperformed by 14.4% in emerging markets and 5.2% in developed markets on average over five years.[2]

Assets invested according to responsible investment principles have grown considerably over the last decade. Since its launch in 2006, over 1,900 companies have signed up to the Principles of Responsible Investment, accounting for nearly US$90 trillion in assets under management.[3]

The opportunity to make positive change

As well as the investment case, the rise of responsible investment has been fuelled by the increasing awareness of the critical challenges the world is facing. The cost of implementing international agreements such as the Paris Climate Agreement or the United Nations’ 17 Sustainable Development Goals is estimated at over US$100 trillion by the Council on Foreign Relations in research published in 2015. [4]

Responsible investing has mobilised a significant amount of private capital to address these challenges. With some governments showing reluctance to lead the way, the private sector is taking the initiative, particularly where there is a direct impact on the interests of companies themselves. The corporate world can’t simply rely on governments to protect the social and material resources they rely on to operate.

Engagement works

Strategies based on screening – excluding companies, countries, sectors or stocks that fail on certain criteria, while favouring those that meet them – have been a starting point for many. But, more and more asset managers are voting at shareholder meetings and engaging with company management to influence corporate behaviour.

One of the main headwinds to greater and deeper change remains the conflicting demands of short-term business considerations and long-term sustainable performance. Traditionally, financial institutions have focused on short-term performance measures, such as share price or 12-month corporate profit. Incentives for management (such as stock options) have been designed to reflect this, leading to a short-term bias in corporate decision making.

This is why we believe change should be driven, or at least encouraged, by asset owners and the asset management industry. This is best achieved through strong and continual engagement with the companies they invest in, to properly reflect the long-term interests of their clients.

New investment opportunities

The push to improve companies could create new investment opportunities by encouraging innovation and disruption across diverse sectors. We see the potential for responsible investing to become even more pervasive, which could have the effect of multiplying the benefits it has already had on industries and sectors such as oil and mining companies.

Taking demographics as an example of a long-term challenge, the associated increased demand for food, water and energy will drive the need for innovative improvements in infrastructure. Clean water, new ways to generate and distribute energy, improved health care, and more efficient transportation provide abundant opportunities for investors with a responsible investment focus.

Achieving gender equality, one of the UN’s Sustainable Development Goals, could also have a profound impact. The Organisation for Economic Co-Operation and Development estimates that the growth impact of reaching gender equality could be as much as 6% of the GDP in advanced economies by 2030. In addition, as women make up an increasing part of the global workforce, products and services that seek to capitalise on women’s increasing share of global wealth represent another opportunity for investors.

[1] From the Stockholder to the Stakeholder, Smith School of Enterprise and Environment, University of Oxford/Arabesque Partners, September 2014

[2] How Markets Price ESG, MSCI, November 2018

[3] Principles for Responsible Investment Annual Report, 2018

[4] https://www.cfr.org/backgrounder/sustainable-development-goals