Mainstreaming Responsible Investment - AccountAbility

Barriers to the Mainstream Practice of
Responsible Investment
behaviour, are necessary to shift investment towards a
longer-term perspective that factors in social and
environmental performance.
Competencies: Different and improved competencies along
the investment value chain (for analysts, fund managers,
trustee advisors and trustees) could increase the account
taken of longer-term value creation propositions, as well as
the materiality of social and environmental aspects.
“I have a narrow window of time to absorb a great deal of information.
I will look at these issues (social and environmental factors) when I get
the time…I don’t know when that will be.” 38
Information
The volume of non-financial information disclosed has certainly
increased, and some standardization in this information has
occurred, for example, through the Global Reporting Initiative
and investor-facing indices like the Dow Jones Sustainability
Index 39 . The credibility of this information has also increased as
a result of improved sophistication within companies and
improvements in standards of assurance 40 . As one analyst in a
roundtable commented, “There is an extraordinarily rapid
growth in the volume and quality of information provided by a
new generation of information brokers entering this growing
market with new products and services.”
Despite this, evidence suggests that information available to
mainstream investors is inadequate for the task of linking
social and environmental factors to financial performance 41 .
Typically, investor surveys suggest that social and
environmental information is increasingly available to them.
However, the incidence of use of such data, beyond providing
one piece of a broad context, remains limited. For example, a
recent survey by Arthur D. Little, produced for Business in the
Community in the UK, highlighted the perception across the
investment community of the inadequacies of non-financial
information 42 .
“When Nestle had a problem in Ethiopia, they ended up giving back US$
1.5 million — this was important, but clearly not seen as a material issue
to Nestle or its investors.” 43
“We have been in and out of the federal supreme court on this labour
issue. But I cannot think of a single instance of a mainstream investor
asking me about it… they are simply not interested and see this stuff as
part of the ‘cost of doing business’.” 44
The analysis of non-financial information is framed by
investors’ interpretations of the materiality of the disclosures in
corporate reporting. Recent regulatory initiatives, such as the
Sarbanes-Oxley Act 45 and the forthcoming changes to UK
Company Law 46 , reinforce the requirement for companies to
disclose aspects of social and environmental performance
relevant to their future business performance. This is mainly
viewed as a healthy development for those focused on
mainstreaming responsible investment, since it will place
company boards at centre stage in signing-off on which
aspects of non-financial performance are material. It will also
require them to be able to provide sound arguments as to how
these aspects have been determined.
Whether these developments make a real difference depends,
however, on the basis by which materiality is defined.
Definitions of materiality are well established in law and in
professional practice, for example, of the financial audit
community. In broad terms these definitions require that the
reporting organization disclose the information about its
performance required by its shareholders to enable them to
make informed judgements, decisions and actions. But in
truth the interpretation of materiality is a largely pragmatic
affair. Generally this involves a focus on “generally accepted”
financial risks and opportunities as usually defined by
quantitative thresholds, thereby largely servicing the needs of
transactional investors. For example, the high-profile, two-year
case of activist Marc Kasky versus Nike brought the company
before the California and federal supreme courts for allegedly
misrepresenting the state of labour standards in its supplier
factories. Even now, after an out-of-court settlement, the case
raises the spectre of further legal action against Nike and
others, based on similar claims of commercial misstatements.
Yet the case has barely raised an eyebrow from the
mainstream investment community which, it seems, sees such
cases as simply an acceptable overhead cost of doing
business 47 . Yet a comparable case that involved far higher
settlement costs would certainly figure on investors’ radars
who, once sensitized to the potential risk, might well then
exaggerate the risk, with resulting effects on share prices.
As one corporate risk manager put it, “Materiality appears a
scientific matter, but actually has more to do with herding:
something becomes material when enough people think it
should be.”
New ways of defining materiality, interpreting it in practice and
subjecting such tests to external assurance are in
development. For example, the five-part materiality test
proposed by AccountAbility, in their submission to the UK
Company Law Review, seeks to expose different
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