Responsible investing is at a watershed. After a long period in the wilderness it has come of age and the industry has been rewarded with a flood of money into a broadening array of responsible investing products. Systemically important matters, such as climate change, income inequality and antitrust abuses, regularly appear in discussions at trustee meetings and in stewardship reports.
A growing, though not yet universal, social obligation, backed by increased regulatory imperatives, is ensuring that asset management firms are committing considerable resources to broadening and deepening their responsible investing activities. Veritably, billions are turning into trillions.
But have those trillions provided the radical redirection of development finance to developing countries envisaged by the World Bank and International Monetary Fund in their 2015 report, From Billions to Trillions? Launching new or relabelled sustainable or ESG funds may align with client demand, and the 17 Sustainable Development Goals make for colourful marketing collateral, but the flow of new capital to pressing underserved or unmet social and environmental challenges remains pedestrian. Even the growth in renewable energy has lagged what is required to deliver global temperature increases to between 1-5-2.0C by 2050.
System change is a complex endeavour and not automatically solved by fresh fund labels, taxonomies or standardised disclosures. To achieve the ambitions of sustainability impact, while delivering robust financial returns needs, the financial services industry has to move beyond scale for its own benefit – linear, incremental and mechanistic – to embrace a more collaborative, complex approach that recognises a plurality of approaches, with adaptation and regeneration at its heart.
It also requires recognition that claims of “win-win” scenarios from ESG investing are often wide of the mark and do not reflect the pragmatic trade-offs demanded in the real world. Despite the explosion of assets managed under the broad “ESG” banner, there is a reemergence of ESG scepticism, partly driven by the reversal in fortunes of ESG funds over the past 12 months, as well as over-inflated marketing claims.
The Global Financial Crisis and the latter Covid Crisis saw economic and market recoveries fuelled by ambitious crisis-management policies. Yet those responses served to widen social divisions, solidify quasi-monopolies, and failed to grasp widely acknowledged environmental challenges; the inability to agree a coordinated response to climate change at COP26 in Glasgow in 2021 was a case in point. The failure by policymakers to correctly align incentives in the system with rhetoric remains a frustration for delivering better sustainability impacts and a distorting influence on sustainable investing ambitions. The invasion of Ukraine by Russia has highlighted the need for governments to set the correct incentives to change behaviours and realign capital allocation with more sustainable outcomes. It is naïve to believe finance alone can achieve this objective.
Change is starting
Despite these concerns, there are signs amid the hyperbole that progress is being made and change is beginning. Collaboration across the actors in the sustainability movement – investors, academics, corporations, entrepreneurs and activists – is rising and contributing important shared learning and challenging entrenched dogma, even if there is still marked disagreement.
Innovation, not only in the use of new forms of technology, but also through developments in financing techniques and social entrepreneurship, are expanding the areas of influence in which investors can operate and generate a real impact.
Active stewardship has not only increased the accountability placed on corporations and governments for the consequences of their actions, it has forced investment management firms to look inward, challenging their own practices and contribution to broader society. New thinking on the concept of “value” is extending beyond financial capital to tentatively embrace natural and social assets, aided by accountants and lawyers, who are emerging as powerful contributors to sustainability impact.
While many think that system change can only come from the top down, that is rarely the case. Embedded actors in the system are coming together to create the groundswell of a collaborative movement that influence policymaking. For investment firms, this must neither be a convenient marketing label or an overlay divorced from their primary function of producing returns to support the saving and retirement needs of their client, if they are to fulfil their sustainability ambitions. They will need to look inwards first and determine their own intentional impact opportunities, and then look outwards to embrace the complexity of a highly interconnected and adaptive system. Only then can we go beyond the inertia of current approaches to ESG.
