Responsible Investment Is Coming of Age

By

Steve Lydenberg, CFAThe CFA Institute Annual Conference is an unrivaled opportunity to access high-quality, unbiased educational content that equips investment professionals with the latest thinking on critical industry issues. The 71st CFA Institute Annual Conference will be held in Hong Kong on 13–16 May 2018.

In the nearly 300 years since John Wesley’s sermon “The Use of Money,” responsible investing has evolved from the moral stance of a few to an approach now widely endorsed by global institutions and hotly pursued by millennials and seasoned advocates alike.

So, where will it go from here?

Will responsible investing be forever niche, or does this child of the financial community have the potential to grow up — educated by the lessons of history, equipped with new technologies, and bold in entrepreneurial confidence — to lead a structural transformation unlike any seen before?

These were the key questions posed by Steve Lydenberg, CFA, partner, strategic vision, at Domini Social Investments, in his presentation “Responsible Investment: Yesterday, Today, and Tomorrow,” at the 69th CFA Institute Annual Conference in Montréal.

Lydenberg sees little difference between responsible investing; environmental, social, and governance (ESG); and the many other terms employed today. He observed that these concepts reflect a broad acceptance by society at large — and now the financial sector — that there is no separation between “business and life,” that not only should financial services do no harm, but that responsible investing has a definite role to play in solving 21st-century business as well as socioeconomic challenges.

As European governments relinquished control of national industries to the private sector in the 1980s and 1990s, for example, shifting social climates and the introduction of such terms as corporate social responsibility (CSR) and carbon market into the financial vocabulary helped these governments establish a soft law culture. This culture instilled social awareness into the company strategies of these new entities. Though Enron and Lehman Brothers serve as two painful reminders of the shortcomings of soft law, advancements made in this period and throughout the 2000s — increased demand for CSR disclosure, the rise of ESG ratings and rankings, and the launch of such campaigns as the Principles for Responsible Investing (PRI) initiative among them — helped pave the way for a climate today where investors, analysts, and the general public all expect companies to demonstrate their credentials across an expanding definition of “social responsibility.”

The advent of social entrepreneurship contests in business schools, the development of ESG impact measurement systems at the portfolio level (IRIS), and the launch (and acquisition) of impact investing businesses by global financial brands serve as just three clear indications of society’s appetite for responsible investing, and the financial sector — originally created to serve society — is now responding.

So, what’s next?

With social responsibility now firmly established across the financial services spectrum, Lydenberg sees the potential for responsible investing to go beyond mere product innovation and deliver fundamental changes to the operating norms of the global financial system. Life’s realities, he said — global population estimates of 11 billion by 2100, increasing tensions around natural resources, and undeniable economic inequality within so-called developed nations, to name a few — suggest that responsible investing, and the motivations behind it, could serve as catalysts for fundamental change.

Lydenberg can envision the clear possibility of a world where all stock exchanges demand companies provide full disclosure on multiple ESG metrics as a prerequisite to listing, where ESG/responsible investing reports are comprehensive, separate from company accounts, and written in jargon-free language that any consumer can understand. But this will take time and be a long and bumpy road. Vested interests remain a key challenge, and the cost of increased reporting burdens must be clearly offset by the benefits to end users and, therefore, the companies undertaking the work.

Nothing is certain, Lydenberg said, but responsible investing is coming of age, and with wise guidance, it could lead the next generation further than was once dreamed possible.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Photo courtesy of W. Scott Mitchell

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