Responsible Investment

Rory Sullivan,Craig Mackenzie

• Verlag: Routledge
• Jahr: 2017
• ISBN:
  9781351283427
• Auflage: 1
• Thema: Business
• Thema: Business General

Most investment today is conducted by a relatively small number of institutional investors – pension funds and investment managers – who manage the pensions and saving funds of millions of ordinary people. The manner in which these institutional investors invest and discharge their responsibilities as the owners of companies is, therefore, of critical importance to society as a whole.

In recent years, some of the biggest institutional investors have actively encouraged companies to improve their management of social, ethical and environmental issues. A number have also sought to explicitly analyse companies' performance on these issues and to incorporate this analysis into investment decision-making. These activities have contributed to important changes: a number of companies have committed to stabilising or reducing greenhouse gas emissions from their activities and operations, labour conditions in many retail supply chains have improved significantly, and many companies have significantly improved their governance of corporate responsibility issues.

However, to date, there has been little systematic analysis of fundamental questions such as: Do responsible investment strategies systematically result in improvements in the social, ethical and environmental performance of companies? To what extent is it in investors' interest to encourage higher standards of corporate responsibility? Do responsible investment strategies enhance financial performance for investors?

In this ground-breaking collection, Rory Sullivan and Craig Mackenzie have brought together some of the leading practitioners and commentators in the field of responsible investment to explore these questions. The contributors to this book present their views on the practicalities of implementing responsible investment strategies, the outcomes that have been achieved, the practical issues and barriers faced in implementing such strategies, and the challenges to be faced if responsible investment is to become a mainstream investment approach. The results are both unique and surprising.

This book will be mandatory reading for all those involved in the field of social and environmentally responsible investment, corporate governance and corporate social responsibility whether they be academics, researchers or practitioners.

Part I
Introduction and background

1
Introduction

Rory Sullivan and Craig Mackenzie

Insight Investment, UK

One of the most striking features of debates around sustainable development has been the manner in which attention has moved from solely focusing on the roles and responsibilities of government towards consideration of the roles and responsibilities of companies. This reflects the dramatic political and economic changes resulting from the fall of the Berlin Wall, the end of the Cold War, the pressures of economic ‘globalisation’ and the drive to attract foreign investment.

Since the early 1990s, companies have extended their supply chains ever more widely and deeply into the developing countries of Asia, Africa and South America, and have invested in countries that were previously ‘off limits’ for political or ideological reasons. While this has brought many economic benefits (both to the companies and to the countries in which they have invested), the benefits have not been unambiguously positive. Concern has been expressed about the adverse social and environmental impacts (e.g. global warming, biodiversity loss, resource depletion) of globalisation and the perceived power and influence of corporations vis-à-vis national governments. There has also been a heated debate about the proper role, responsibility and level of accountability of corporations in a ‘globalised’ economy, heightened by examples and allegations of corporate wrongdoing and inappropriate influence on government, both in the developed and the developing countries (see, for example, Balanya et al. 2000; Dobbin 1998; Korten 1995; Monbiot 2000; Woolfson and Beck 2005).

The fact that corporate activities have such a powerful and controversial impact on modern societies is important to investors for two reasons. The first is that these factors may affect investment returns. For example, shareholder returns in energy-intensive sectors may be reduced by the introduction of a tax on greenhouse gas emissions. Secondly, investors may have some moral responsibility for the harmful activities of companies and may, therefore, face pressure to correct these activities. For example, it has been suggested that one of the reasons why companies behave unethically is because of the pressure from investors to put short-term profits ahead of corporate responsibility. It has also been suggested (Monks and Sykes 2002) that another reason for unethical corporate behaviour is that investors fail to hold company boards properly to account for their corporate governance. The question of moral responsibility is of particular importance given that most investment today is conducted by a relatively small number of institutional investors¹ who manage the pensions and saving funds of millions of ordinary people. Therefore, the manner in which these institutional investors (pension funds and fund managers) invest and discharge their responsibilities as the providers of capital and the owners of companies has important consequences for society as a whole.

There is a growing belief that investors, in particular large institutional investors, have a responsibility to work proactively to address the environmental and social impacts of their investments. There have been demands from government as well as stakeholders, such as trade unions, that institutional investors act to ensure the probity of the companies in which they invest (Gribben and Faruk 2004). The rationale for these demands is that active shareholder participation can play a major role in encouraging high-quality corporate governance that will deliver long-term shareholder returns, while also offering the potential to deliver broader societal benefits. Over the past ten years, UK shareholders have used their power quite successfully to: create longer-term incentive structures for directors; increase board independence and executive accountability; create better risk management infrastructure (making it harder for incompetent or self-seeking managers to take unjustifiable risks with the business); and improve the quality of company policy, management systems and disclosures on issues such as climate change, bribery and corruption, supply chain labour standards, human rights and access to medicines.² These activities have contributed to important outcomes such as dramatically reduced prices of AIDS medicines, the withdrawal of companies from unhelpful industry lobby groups and improvements in labour conditions in retail supply chains.

There has also been a growing recognition of the materiality³ of social, ethical and environmental issues to investment decision-making. Examples of where these issues have impacted directly on company financial performance have included litigation (e.g. tobacco, asbestosis, product liability), regulation, taxation and other market instruments, and company failure as a consequence of probity failings (e.g. Enron). As a consequence, several fund managers have announced research programmes to better integrate these issues into their investment activities. Investment analysts have responded by increasing the amount of research they do in this area, and have produced reports on issues such as HIV/AIDS in the southern African mining industry, the effects of the EU’s emissions trading scheme on European electricity utility companies, the implications of obesity for food producers and retailers, and the effects of climate change on the insurance sector.

About this book

What is responsible investment?

There is a lack of agreement on how responsible investment could be defined. According to Mansley (2000: 3), an initial definition could be something like:

Investment where social, ethical or environmental (SEE) factors are taken into account in the selection, retention and realisation of investment, and the responsible use of the rights (such as voting rights) that are attached to such investments.

However, this is an extremely broad definition and leaves open a number of questions about the scope of these concepts and the manner in which these factors should be taken into account.

This book is being written at a time when the definition and practice of ‘responsible investment’ is under scrutiny. For a number of years, it has been assumed that the only ethical approaches available to investors were either to shun certain stocks (e.g. ‘vice’ stocks such as tobacco, gambling, alcohol and pornography) or to invest in certain positive activities (e.g. environmental technology or healthcare). While such approaches have the advantage of appealing to relatively simple conceptions of right and wrong, they have struggled to become more than a relatively small part of the total investment market (for a further discussion on this, see Chapter 3). The reasons for this are various but include the relatively small proportion of the population that feels sufficiently strongly about such issues to make a positive choice on how its money is invested, and the perception that such investments carry a higher risk than conventional investments. From the perspective of encouraging companies to improve their performance on social, ethical and environmental issues, a blanket refusal to invest in a specific company also means that such investors (given that they represent a relatively small minority of shareholders) have limited ability to encourage higher standards of corporate responsibility (Sparkes and Cowton 2004: 48).

These limitations have created interest in alternative approaches to addressing social, ethical and environmental issues in investment. Two major strategies or responses have emerged. The first, as discussed above, is to enhance mainstream investment processes to explicitly analyse company performance on these issues, and then to incorporate the results into investment decision-making. The second is for investors to use the formal rights and informal influence granted to them as shareholders to encourage companies to pay appropriate attention to the management of social, ethical and environmental issues. Recent years have seen a dramatic increase in the number of investors using one or both of these strategies (see, generally, Eurosif 2003; Mansley 2000; Sparkes 2002), although across Europe as a whole, these investors remain in the minority.⁴ The UK has been at the forefront of these changes with some £84 billion of pension fund assets now managed through engagement or shareholder activism mandates (Eurosif 2003: 23).

Who are the key actors?

The focus of this book is on what is referred to as the institutional market, which is a general term for investments managed or controlled by insurance companies, pension funds and investment managers, and investment managers in pension funds, mutual funds and other pooled investment vehicles. Institutional investors invest on behalf of large numbers of individuals who have their pensions and savings invested in these funds. Most pension funds operate under trust law. This imposes a ‘fiduciary’ obligation on the trustees and fund managers involved to serve the interests of those whose money is invested in these funds—these interests are usually interpreted in exclusively financial terms.

Pension funds may manage their money themselves or may appoint one or more fund managers to do so. In practice, the vast majority of pension funds use external investment managers (or fund managers). Fund managers are specialist organisations that manage the funds of investment intermediaries, particularly pension funds. While investment terms or objectives are agreed with clients, fund managers have the primary responsibility for day-to-day investment decisions (Monks and Sykes 2002: 12).⁵ In general, fund-manager performance is judged over relatively short periods (usually three years in the UK but with more regular, typically quarterly, reviews of performance). Consequently, there may be a significant mismatch between the periods over which fund managers are judged and the longer periods over which investment returns are required by beneficiaries.

Pension funds are advised in the selection and appointment of fund managers, and on a range of other issues relevant to their investments, by firms of investment consultants. The views that these consultants hold about particular managers or about particular investment strategies—including views on the investment relevance of social, ethical and environmental issues—are very important in determining which managers succeed in winning mandates.

What are the key questions?

To date, there has been little systematic analysis of the implications of these approaches (i.e. shareholder activism and enhanced analysis of social, ethical and environmental issues) for mainstream investment activities. In this book, through providing an account of emerging practice in addressing social, ethical and environmental issues in investment activities, we consider the following questions:

• Do responsible investment strategies actually contribute to improvements in the social, ethical and environmental (SEE) performance of companies?
• To what extent is it in investors’ interests to encourage higher standards of corporate responsibility?
• Do responsible investment strategies enhance financial performance for investors?

The vast majority of the contributions to this book are from practitioners (fund managers, corporate governance or corporate responsibility specialists, investment analysts, investment consultants) or stakeholders (trade unions, non-governmental organisations [NGOs]), rather than academic commentators. This was a deliberate choice on our part. The practice of responsible investment has developed rapidly, and there has been little systematic analysis of how practitioners (as opposed to onlookers) actually implement responsible investment, or of how practitioners and stakeholders perceive the role of shareholder activism or enhanced analysis in mainstream investment processes. By inviting practitioners to contribute, we also expected to be able to address the final question above: namely, what are the strengths and weaknesses of current practice, and what are the barriers to making responsible investment a standard part of mainstream investment processes?

What is the scope of this book?

Given the particularly rapid development of new approaches to responsible investment in the UK in recent years, this book focuses primarily on the UK (although there are also articles from practitioners in the US and Switzerland). However, the lessons learned and conclusions drawn are also generally applicable to other countries, reflecting the increasing influence of the Anglo-American model of share ownership, and the relevance of social, ethical and environmental issues to all companies.

We concentrate our attention on investments in equities and bonds, specifically the relevance of social, ethical and environmental issues to the issuers of, and investors in, shares or debt and the manner in which institutional investors act to influence investee companies to address these issues. Clearly, these issues are also relevant to other investment classes, such as property or direct project investments. However, the manner...

Inhaltsverzeichnis

• Cover
• Half Title
• Dedication
• Title
• Copyright
• Contents
• Foreword
• Part I: Introduction and background
• Part II: Enhanced investment analysis and decision-making
• Part III: Shareholder activism
• Part IV: Perspectives on responsible investment
• Part V: Discussion and conclusions
• Appendix 1 Innovest Intangible Value Assessment: Aracruz Celulose
• Appendix 2 Just Pensions: Pharmaceutical Sector Note
• Abbreviations
• About the contributors
• Index