This is a question that I have recently been asked. To some in mainstream finance, I’m sure that just posing such a question would be sufficient to make them shake their heads in exasperation. One would likely get responses of this nature: “To be ecologically and socially responsible? — Our job is to make money and to get the best possible returns!”
In understanding the world of investments, it’s probably more appropriate to ask the question “What is the key to helping those in mainstream finance to understand that including environmental, social and governance (ESG) factors into their research methodology can provide better returns?
Professionals in the investment community are subject to the rules of fiduciary duty. This means, that no matter how much an individual may personally be pre-disposed to a particular thinking or direction, one has a duty to follow the directives (or the policy) as stipulated by their client. What’s not well understood by the mainstream financial community is that the 2009 UNEP Financial Initiative report produced a legal opinion on fiduciary responsibility. The report suggests that an investor might not be respecting his/her fiduciary duty if he/she does not take ESG issues into consideration.
So if we reframe the question – then, how do we get mainstream investors to understand the important of ESG factors? Well, according to an 2010 Accenture survey of more than 700 Global CEO’s, 93% noted that sustainability is “important” or “very important” to their company’s future success. (From an investment standpoint, the use of the word sustainability includes the integration of environmental, social and governance factors into fundamental financial analysis). Given the acknowledgement of the importance of such issues, it is becoming increasingly apparent that integrating ESG factors should be part of all analysts and portfolio managers day-to-day work. The issue is that the majority of these individuals are:
- Unaware of the importance of sustainability issues;
- Unaware of the competitiveness that these issues bring to not only their own roles, but also to the companies in which they invest;
- Unable to find appropriate education that is adapted to their specific needs given they are under enormous pressure to perform on a day-to-day basis.
I believe education is the key. In my opinion, those most in need of education are:
- Research directors of buy and sell side firms
- Financial analysts of buy and sell side firms
- Portfolio managers who actively use this research
- Chief Executive Officers and Chief Investment Officers of all public funds
- Directors of publicly-listed companies, public funds, endowment funds and foundations
- The general public
I’d like to comment on the last point. Recently I read an article by Hazel Henderson who noted that a tipping point is when public sentiment shifts. Well, in regards to sustainability and the specific ESG factors that can provide a insight into competitive positioning of companies — we need to educate the public.
As society becomes increasingly aware of global environmental and social issues that we face, frustration is growing. Status quo no longer works. As we watch the Occupy Wall Street demonstrators, my sense is that members of society are not aware that they too hold power.
Many people in society, in some form or another, are participates in pools of capital. Many have access to a pension fund (be it provincial or corporate), own shares in companies through their retirement investment portfolios or the organizations for whom they work, through endowment funds or possibly through a foundation with whom they give of their time. Each of these pools of capital will need to be invested to generate a return.
Where the power lies is in requesting that those who manage these pools of capital make a concerted effort to put into place responsible or sustainable investment policies. Once the policies are in place, those who manage said capital have a fiduciary duty to manage it according to such policy.
So ultimately the question is not only how we can get mainstream finance to become more responsible, but also how do we educate society so they realize that they hold in their hands the power to make the difference they desire!
People have the power to ask the right questions. The problem is that most are either intimidated by the world of finance or simply don’t know enough to ask the right questions. Overall, the education needs to be focused on both sides of the equation. Those who own the money and those who manage the money!