Mainstreaming Responsible Investment - AccountAbility

The State of Responsible Investment
Sasol’s SEC 2003 filing highlights the slow pace of black
economic empowerment as a significant risk that may
adversely affect the business, operating results, cash flows
and financial condition. Similarly, recent poor performance in
Europe of leading US retail brands has been attributed by
some business commentators to broader international
disenchantment with the US. More positively, shares in Brazil’s
top cosmetics group, Natura, offering mid-range products
grounded in strong social and environmental credentials,
soared almost 12% on their debut on the Brazilian stock
market in June 2004.
These developments, however, have to be balanced against a
background of continued marginalization by the investment
community of most social and environmental issues. As one
analyst commented in one of the roundtables, “We do look at
long-term factors, but they are strictly background to the
dominant variables like free cash flow and, to be frank,
rumours on the street about the company.” A major survey of
UK investors’ attitudes to environmental and social issues
found that less than 5% of financial analysts and fund
managers, when asked (unprompted) what they take into
account when making or recommending investments,
mentioned social and environmental aspects of corporate
performance. 18 Similarly, the same survey cited in “Values and
Value” found that the majority of fund managers and analysts
did not believe that social and environmental factors affected
short-term market valuation. That is, even where there is a
growing belief that social and environmental issues do, should
or could count, the fact is that most analysts and fund
managers do not take such factors adequately into account.
This fact is rooted in short-term horizons dominating today’s
financial markets, and associated approaches to valuation and
profit-taking, and reflects a continued resistance to
mainstreaming responsible investment.
Nevertheless, there is little doubt that investors are taking nonfinancial
issues more seriously, as a growing number of
leading practitioners, public bodies and thought leaders profile
both the potential and necessity of such a development.
A growing number of financial institutions have declared their
commitment to sustainable development or some variant of
corporate responsibility. For example, twenty major investment
companies – including Banco do Brasil, Credit Suisse Group,
Deutsche Bank, Goldman Sachs, HSBC and Morgan Stanley
– have endorsed a recent United Nation Global Compact
initiative report 19 providing guidance in this respect. Similarly,
the Global Reporting Initiative is working with ten financial
institutions from Australia, Germany, the Netherlands, South
Africa, Switzerland and the UK in developing a sector-specific
reporting supplement.
An Emerging Responsible Investment Movement
The “Responsible Investment Initiative” was launched in mid-2004
by the United Nations Environment Programme Finance Initiative
(UNEP FI), with investors proposing a global alliance to guide
responsible investment best practice. Twelve firms from the asset
management sector have committed to developing the ability of
mainstream fund managers to identify and respond to social and
environmental issues relevant to their profession. (http://unepfi.net)
The World Business Council for Sustainable Development’s
(WBCSD) “Capital for Change” guide for investors aims to support
sustainable livelihood business activities that serve the needs of the
poor and contribute to companies. “Finding capital for sustainable
livelihoods businesses” advises companies to shift their financing
strategy from a “centralized” capital strategy, which primarily
involves commercial banks, to a “distributed” capital strategy.
(www.wbcsd.com)
Twenty major investment companies have endorsed a recent United
Nation Global Compact publication “Who Cares Wins —
Connecting Financial Markets to a Changing World” on connecting
financial markets to environmental, social and governance criteria,
and agreed on how these factors would become standard
components in the analysis of corporate performance and
investment decision-making. (www.unglobalcompact.org)
The Equator Principles represents an industry approach for financial
institutions in determining, assessing and managing environmental
and social risk in project financing, and has been signed by 27
major banking institutions. (www.equator-principles.com)
Fannie Mae Initiative - More than US$ 80 million has been
committed for local anti-predatory initiatives in cities across the
country, as part of a responsible lending strategy.
(www.fanniemae.com)
The Investors’ Right-to-Know campaign asks US mutual funds to
voluntarily publicly disclose their proxy voting polices and voting
records, in order to make mutual funds more accountable and lead
to a stronger corporate governance process that balances the
interests of all stakeholders – stockholders.
(www.responsiblewealth.org)
The Corporate Library evaluates “board effectiveness” based on
indicators of special interest to shareholders and investors, to
determine which boards are most likely to enhance and preserve
shareholder value and which boards might actually increase
investor risk. (www.thecorporatelibrary.com)
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