Investing in the future - a time for SRI
At the start of 2008 few people could have predicted that subprime would make it into the Oxford English Dictionary and Robert Peston would become a household name. But as markets crashed and banks collapsed it proved to be a very tough year for any charity with a stake in the stock market.
It is perhaps not surprising that with an estimated 19% drop in the value of charity investments and increasing pressure on resources that charities are focusing on income generation rather than reviewing their investment policy. Socially responsible investment (SRI) may be slipping off the agenda, at least for now.
But the need to safeguard investments and generate the best risk-adjusted returns is entirely compatible with SRI. Considering environmental, social and governance issues is more relevant than ever. It’s a time to re-visit rather than jettison ethics.
After all, it could be argued that a lack of ethical behaviour was a contributory factor to the financial meltdown. So continuing to pursue profit at the expense of principles could lead to a similar crisis in future.
There has been much discussion about the causes of the credit crunch, and it’s important for all investors that we learn from what went wrong. All asset owners, including charities, share a responsibility for what is done in their name and in pursuit of their interests. We will all benefit from ensuring that the capital markets remain healthy and we could all play a part in encouraging the financial sector to operate in a responsible and sustainable way.
The financial crisis highlighted the disconnect that developed between investors and the businesses producing goods and services that require their capital. So it is time for us all to reflect on how our funds are being used, by whom and to do what.
The responsible investment community has been pushing for increased accountability, transparency and disclosure from companies and the financial sector for many years. Perhaps in the past the responsible investment community lacked the size and influence to achieve all that it wanted. But now these values are key for all investors.
Ruth Murphy, Director of Business Development, Charities at Newton Investment Management contends: “Some of the current problems facing the financial markets have come as a result of irresponsible business practices. One of the biggest lessons learnt from the current economic situation is that shareholders should be holding companies to account. A well managed business is one that applies the principles of good corporate governance and identifies key risks, including environmental, social and economic ones.”
All charities should know with what is in their portfolio and how their investments are being managed. With increased public scrutiny of finance and investment, charities could increasingly be expected to publicly account for their investments. For example, last year the Church Commissioners had to answer some difficult questions about their handling of the Church of England’s investments following comments by the Archbishops of Canterbury and York on the practice of short-selling (borrowing shares and selling them on, in the hope of buying them back later at a lower price).
The credit crunch experience has highlighted the importance of considering risks in the broadest sense. A fundamental principle of responsible investment is the inclusion of environmental, social and governance (ESG) risks and opportunities in investment decisions. ESG risks all have the potential to impact the bottom line. As we’ve seen with irresponsible lending in the US, the impact of ignoring such risks can be significant.
Issues such as human rights and HIV/Aids will not disappear because of freefalling markets. In the long-term, the way companies deal with these issues could affect their market position and performance.
Other crunches – such as the carbon crunch – could follow the credit crunch.
Lord Nicholas Stern, author of the Stern Review, has commented that there are lessons we can draw from the financial crisis in how we tackle climate change. He contends that we have to look ahead and think about the consequences of our actions, rather than ignoring a looming crisis.
Danyelle Guyatt, Global Head of Responsible Investment at Mercer, commented
“The credit crisis highlights our vulnerability to systemic issues; let’s hope this has been a sufficient wake up call for policy makers, corporations, investors and consumers alike to take other systemic risks more seriously, such as climate change – which in our opinion, is the next ‘elephant in the room’ that needs to be tackled with more urgency than is currently the case.”
The ability of companies to respond to the implications of climate change is likely to affect their long term sustainability, and so investors should view the consideration of climate change as a form of risk mitigation.
It is now possible to analyse your investment portfolio to assess the level of risk you maybe exposed to in terms of climate change and other financially relevant risks. It is also possible to engage with fund managers to ensure they are acting in a manner consistent with the value and interests of your charity, and to find fund managers willing to engage with invested companies to ensure they are properly managing all external risks.
If you are not certain where and how your funds are invested, and what risks you may be exposed to, further help is available from www.charitysri.org – a free online tool that explains the ins and outs of responsible investment.
At a time when charities resources are limited, it seems to make sense to make the best use of these, which means using investments to complement and further objectives rather than undermining them.
Sam Collin
EIRIS Foundation
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