Responsible investment

The links between investment and development

The impact of investment on sustainable development is twofold. First of all, there is a direct impact of investment flows: If investment supports sustainable and responsible companies and projects, it can have a positive impact on international development. If, however, investment supports economically profitable but socially and environmentally harmful business and projects, it can have a hugely negative on international development. There is also a indirect but nonetheless important link between investment and development: Investors’ beliefs often shape markets. If investors believe a particular issue or concern is true and important and invest accordingly, it will be taken seriously elsewhere. For example, if investors emphasise the importance of environmental, social and governance challenges, companies will take them better integrate them into their strategic decisions as they want to maintain the confidence of investors. Investment decisions can therefore be an important driver for companies’ responsible behaviour and therefore for sustainable development.

What is socially responsible investment (SRI)?

There are no universally accepted definitions of Socially Responsible Investment (SRI) but broadly speaking we can categorise it as investment that combines investors’ financial objectives with their commitment to social concerns such as social justice, economic development, peace or environmental concerns. There are basically three traditional tools which SRI analysts and managers use to make their investment decisions:

• ‘screening’ i.e. taking into account the negative and positive impacts of a company and the investor makes a decision whether to invest into this company
• ‘preference’ where a SRI fund adopts social, environmental or other ethical guidelines which they prefer companies to meet. These guidelines are applied where all other things are equal (e.g. financial performance)
• ‘engagement’: managers of funds "engage" with the companies to encourage them to make such improvements in their environmental, social and ethical performance.

The largest part of the SRI community comprises ethical financial institutions (i.e. pension funds, insurance companies, banks) which strive for financial as well as social and environmental profitability as part of their core mission. Regular financial institutes have, however, also started to develop “green” or “social” funds which they offer alongside their normal funds. Nevertheless SRI has not yet been integrated into the mainstream funds of major financial firms, and has therefore remained at the periphery of concerns for most companies.

Sustainable investment in the mainstream investment community

The mainstream investment and finance community is, however, becoming increasingly aware of the advantages and opportunities of ethical or responsible investment. As a result more and more investors are integrating environmental, social and governance (ESG) concerns into their investment decisions. A good indicator of this development was the launch of the United Nations Principles for Responsible Investment (PRI) in late April 2006. The principles are now signed by more than 70 institutional investors from 16 countries. The PRI provide a list of possible actions for incorporating environmental, social and governance issues into mainstream investment decision-making.

While ethical concerns have played a role in this shift of thinking among the investment community, there is also a strong business case for better integrating ESG concerns. There is robust evidence that ESG issues positively affect shareholder value: sustainable companies have proven to perform much better and therefore maximise investors’ profits. In addition to that it can help investors to manage risks better. Furthermore a recent report by an international law firm demonstrated that integrating ESG considerations into investment analysis, is not only legally permissible but arguably also required in a number of jurisdictions. Yet, despite some positive developments many mainstream investors remain critical. The financial sector, in particular the investment community, still has a long way to go before becoming truly sustainable. A shift in thinking, away from short- term profit concerns towards long-term investment returns, will be instrumental for achieving this.

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