Responsible Investment in the 21st Century

Heartland note: The following is featured as a foreword in The Responsible Investor Handbook, published by Greenleaf.

The fact that the Principles for Responsible Investment (PRI) now has almost fifteen hundred signatories including over three hundred asset owners and nearly one thousand asset managers provides evidence that responsible investment is increasingly seen as a standard part of mainstream investment practice. Over the past decade, PRI signatories have encouraged improvements in the environmental, social and governance performance of the companies in which they are invested, and they have made significant investments in areas such as renewable energy.

Despite this, the sense is that responsible investment has yet to deliver on its full potential as a positive influence on corporate practice or in society more generally. There are various reasons: outdated or misguided views on fiduciary duty, the perception that a focus on ESG issues does not add value to investment decision-making, the emphasis on short-term investment performance, weak governance structures and processes, the advice being given by investment consultants, the lack of accountability for the negative ESG impacts resulting from investment decisions, and a lack of attention to the wider interests of workers and retirees. These have resulted in investment practices that ignore long-term risks and that are focused on market timing and short-term gains at the expense of sustainable, long-term value creation.

It is in this context that Greenleaf’s new book—The Responsible Investor Handbook: Mobilizing Workers’ Capital for a Sustainable World—is so important. It is not just a how-to guide to responsible investment but also provides a philosophical basis for responsible investment in the 21st century.

Its starting premise is that great change is possible. The book shows how the labor movement and its allies have pioneered long-term investment in the real economy, delivering better corporate governance, strengthening worker rights and protections, and providing capital to build affordable housing, support the manufacturing sector, and grow the clean economy.

It then offers a new vision for responsible investment. Its argument is that responsible investment should reflect the intrinsic interests of workers, not only by generating competitive financial returns, but by contributing to the long-term wellbeing of economies, societies, and the environment. It makes the point that this approach to responsible investment—investing in infrastructure, encouraging corporations to invest in new factories, research and development, and workforce training, making housing more affordable and energy efficient, responding to climate change, creating high-paid and high-quality jobs—clearly aligns with the long-term interests of plan participants and beneficiaries.

It also provides a pathway for action. It highlights the central role of pension fund governance, and the key role that needs to be played by well-informed and socially aware trustees, that are both willing and able to challenge investment strategies that prioritise short-term performance over long-term value creation.

Finally, it concludes that by leveraging large pools of workers’ capital, pension funds can deliver positive social, economic and environmental outcomes, both for beneficiaries and for society at large. However, to deliver this at the scale needed requires workers and their representatives in the trade union movement to find common cause with other investors (e.g. those that have already made commitments to responsible investment) and with other civil society organisations. If they can find this common ground and work effectively together, there is the real prospect that responsible investment can accelerate our progress towards creating a more economically and ecologically sustainable society.

Text adapted from Dr Rory Sullivan’s foreword to The Responsible Investor Handbook: Mobilizing Workers’ Capital for a Sustainable World.

Dr Rory Sullivan is the General Editor of the Greenleaf Responsible Investment Series. He is an internationally recognised expert on responsible investment, and has advised organizations such as the PRI, UNEP FI, and the UN Global Compact on the law and policy issues around responsible investment. He is the co-author of the PRI and UNEP FI report Fiduciary Duty in the 21st Century (2015), the author of the Global Compact report Coping, Shifting, Changing: Strategies for Managing the Impacts of Investor Short-termism on Corporate Sustainability (2014), and the author of Valuing Corporate Responsibility: How Do Investors Really Use Corporate Responsibility Information? (Greenleaf Publishing, 2011).

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