The world faces a singular challenge. How will we provide for as many as nine billion people by 2050, each one aspiring to the standard of living typical of the affluent European and US middle classes? And how can this be done with finite amounts of land, water and natural resources, already heavily degraded by human activity, whilst adapting to the destabilizing effect of a warmer, less predictable climate? The political, economic and business strategies of the 20th century will need to be rethought in order to meet this challenge. No sector of society will be unaffected.
For most people, money is a means of achieving a good life. This may range from bare subsistence for a poor client of a microfinance loan to the personal independence of a ‘golden retirement’ for a middle class pension-holder or mutual fund investor. It could also mean providing a basis for social position, philanthropic action or political power. However, making money is not a goal in and of itself, nor an end goal for society, but rather a means by which humanity can sustain and enhance its well-being.
There are many good reasons for transitioning from business as usual investment to responsible investment. First and foremost it can be done without sacrifice to financial performance, with reduction in real risk and in better alignment with the inclusive goals of beneficiaries. In summary:
1. Financial and non-financial value are mutually dependent. Acting on ESG matters contributes to the economic conditions necessary to produce satisfactory financial returns to their beneficiaries
2. Morality makes markets and markets make morality. But markets cannot solve all problems, and market pricing can be far off from real value and real risk. Arguably, investment approaches that tie investors to market dysfunctionality are not within the bounds of responsible investment.
3. Business decisions inextricably contain ethical judgments. Consider executive and board decisions about how much to pay in dividends to capital and how much to pay in wages to labour; or how much to pay different strata in the company. Such decisions involve ethical judgments, and require intermediation between competing interests.
4. The collective responsibility of an investment firm (asset owner or manager) does not exempt individuals in a firm from being accountable, answerable and responsible for its actions, and vice-versa. Not taking social and environmental risks into account in investment decisions could create asset owner and manager liabilities.
5. Fiduciary duty does not require investors to pursue short-term profit maximisation at the expense of ESG performance and outcomes. Indeed, it would not be in the interests of their beneficiaries and society more generally to do so.
6. By virtue of the fact that they collectively control and manage the flow of savings from the public, large asset owners and asset managers have a responsibility to avoid systemic risk in the financial system and economy. This is currently under-appreciated by the investment industry and insufficiently addressed by regulators, and should be the subject of future action and research.
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