Mainstreaming Responsible Investment - AccountAbility

Modes of Responsible Investment
expenses” 30 . Interpretations of what constitutes prudent
investment behaviour are constantly evolving, however these
have, in general, been taken to mean a focus on financial
returns.
Transactional investment strategies linked to social and
environmental screens have in recent years grown in interest to
the mainstream investment community. This is partly because
of the growth in retail consumer demand. But beyond this, it
has become more apparent that the research underlying many
SRI screens can be an effective element of a risk assessment
strategy and practice. The collapse of Railtrack in the UK, for
example, came as a shock to many mainstream investors.
Interestingly, many ”ethical funds” that had historically invested
in railways as an appropriate form of transport had already
withdrawn their investments from this company, due to
interpretations of its poor record in addressing a range of
social and economic issues. More generally, there is a growing
recognition that SRI-oriented investment research can reveal
aspects of risk not adequately captured or analysed by
mainstream analysts. Similarly, concerns expressed by the SRI
community over traditional mainstream safe-havens such as
tobacco, alcohol (and most recently pharmaceuticals and
food) have all proved significant in predicting the actualization
of societal concerns into material risk.
Stewardship Responsible Investing
“Stewardship Responsible Investing” is where the investor
engages with corporate management in order to influence and
improve corporate governance, and thereby impact on social
and environmental as well as financial performance.
Engagement in this sense refers to “active investors” who
make full use of the rights of ownership in order to exert
influence on the company’s policies, whether through
resolutions proposed at annual shareholders’ meetings or
through a regular constructive dialogue with the company’s
management. This approach is usually effective only when
leverage or a specific critical mass can be achieved. Therefore,
this strategy becomes most effective when implemented by
institutional rather than individual investors. Best-of-sector
type approaches are gaining in popularity, using positive
engagement, and screening and investment/divestment as
sources of leverage.
Stewardship strategies increase the degree to which social
and environmental factors are taken into account in different
ways:
Business risks and opportunities are more closely
associated with social and environmental factors over
longer periods of time.
Long-term engagement increases the investor’s
understanding of these risks and opportunities and how
they best might be mitigated or capitalized upon.
Active engagement with corporate management increases
awareness of, and competencies in, dealing with social and
environmental factors.
“It’s all about shareowning as opposed to shareholding —
ownership is both a right and a duty…”
Mark Anson, CIO, CalPERS 31
Long-term investment is clearly a key ingredient of influencing
corporate behaviour and enhancing shareholder value. Longterm
investment as a means of enhancing shareholder value is
not a new concept. Berkshire Hathaway’s long-stated goal is to
maximize the average annual rate of gain in intrinsic business
value on a per-share basis. Berkshire Hathaway outperformed
the Standard and Poor’s (S&P) index from 1952 to 1995, in all
but three years 32 . The exceptional returns of Berkshire Hathway,
whose long-term engaged investment approach has been
acknowledged, belies the view that short-term gains must be
more beneficial than long-term investment strategies.
This type of approach also underpins, for example, the
Australian Eco Share Fund managed by Westpac Investment
Management 33 , Friends Provident and Schroeder, and others,
which similarly use their power as shareholders in proxy voting
and discussions with the investees, to encourage companies
directly in the promotion of more socially and environmentally
responsible practices. From each single sector or industrial
group, the best companies, in relative terms according to
corporate social responsibility (CSR) criteria, are identified and
included in the portfolio. This method uses conventional,
benchmark-oriented investment research and portfolio
optimization methods. The degree to which the “best-in-class”
principle is applied determines the risk diversification potential.
Differences can be substantial, for instance between Dow
Jones Sustainability Indices and the FTSE4Good criteria, for
excluding and including stocks. There are difficulties in the
best-in-class approach such as the special need for
communication and explanation associated with the selection
of certain stocks. For example, it is frequently asked how one
can justify the inclusion of oil or tobacco companies in a
sustainability index. As the portion of SRI funds under
management increases it becomes increasingly problematic
for major investors to divest themselves of companies with
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