Can investors create a sustainable economy?

SRI has a role in the transition to a green economy, but its value should not be overstated, argues Rory Sullivan

While there is a substantial body of evidence that investor engagement can make an important contribution to the manner in which companies manage their social and environmental impacts, there are clear limits to the contribution that investors can make to the delivery of sustainable development outcomes. The reality is that, notwithstanding the commitment that many investors have made to initiatives such as the UN-backed Principles for Responsible Investment, the majority continue to focus most attention on those issues that are financially material over relatively short investment time-horizons. While companies do recognise that they need to consider and balance a whole series of interests and factors in their decision-making, it is difficult for company management to resist the pressure to focus on short-term financial performance over the longer-term sustainability of the firm.

The consequence is that policy-makers should take a cautious view on the role that responsible investment can play in the transition to a more sustainable economy. Where there are clear drivers for companies to take action, investment research and investor engagement can play an extremely valuable role, through encouraging companies to identify risks, establish and effectively implement management systems and processes, set targets and report on performance. In the absence of clear policy drivers or incentives, investors are much less likely to take social and environmental issues into account in their investment research or to press companies to improve their performance on these issues.

Of course, public policy is not developed in a vacuum and investors are important stakeholders in the policy process. It is here that the most exciting convergence between responsible investment and sustainable development can be found. There are two aspects to highlight. First, investor support for better corporate disclosures on issues such as climate change, water and access to medicines has helped other stakeholders engage with and seek to influence corporate performance. That is, investor action has helped, at least partially, create the space for more effective civil society regulation.

Second, and perhaps more importantly, investors have shown an increased interest in ensuring that public policy is structured in a manner that corrects the market failures that provide perverse incentives to companies. The most exciting examples to date have related to climate change where investors have supported the establishment of long-term greenhouse gas emission reduction targets, and have encouraged companies and governments to support and work towards these targets. This type of public policy engagement may well be the point where responsible investment makes its most substantive contribution to the goals of sustainable development.

Rory Sullivan is the author of Valuing Corporate Responsibility: How Do Investors
Really Use Corporate Responsibility Information? (Greenleaf Publishing, March 2011).