All responsible now
Encouraged by the United Nations Environmental Program, principles of ‘responsible investment’ are being adopted by big investors all over the world. The UNPRI has been by far the greatest catalyst for bringing environmentally and socially conscious investment to a vastly expanded audience since its inception in 2006. This is surely a good thing. But it has not however yet resolved the inherent contradictions and conflicts that still lie at the heart of the concept.
Sir John Templeton, the famous investor and philanthropist, once said “competitive business has reduced costs, has increased variety, and has improved quality”. And if a business is not ethical, he added, “it will fail, perhaps not right away, but eventually.” He was expressing the familiar hypothesis that, for a truly sustainable business, financial, social and environmental imperatives converge in the long-run.
To whom, for what?
To plead for more ‘responsibility’ is to beg the obvious questions: to whom and for what? Institutional investors have a fiduciary duty to their beneficiaries which is widely accepted to be compatible with wider societal goals. Moreover, the prospects for sustainable flourishing of human society and the natural world can be significantly enhanced if capital is efficiently allocated in this noble pursuit. Responsible investors who take ‘ESG’ – environmental, social and governance considerations – into account in their decisions will, in so doing, drive capital towards more sustainable business models. That has led many to extend the legal argument: to say that considerations of ESG in investment decision-making are in fact constitutive of investor’s fiduciary duty.
However enlightened this may be, it is still an argument from self-interest. What’s more, it is narrowly drawn in the sense that a responsible investor’s primary duty remains to the asset-owning beneficiary or trustees responsible for safeguarding their interests. As things currently stand, this interest is expressed as a promise of future financial reward: for example, a retirement income. For an individual investor, any wider obligation to society (or to the natural environment) is secondary. They remain fully accountable to the beneficiaries to whose interests they serve. To the extent that wider goals are nonetheless met by ‘sustainable capitalism’, they do so only indirectly through a more efficient allocation of self-interested capital.
Companies that successfully manage the social and environmental aspects of their business well – both the risks and opportunities – may well profitably endure in the long-run. They will be ‘winners’. The responsible investor’s wider social role is served by continuing to pick winners (and avoid losers) on behalf of its beneficiaries. In this regard, they remain responsible to their beneficiaries for their past performance and assume an obligation to do so in the future. There is nothing really new here.
The problem with the ‘convergence hypothesis’ of sustainable business is: (i) the long-run is a series of short-terms, and (ii) in the short term, companies which manage their social and environmental aspects well are not necessarily winners in financial terms. We are therefore compelled to ask: why should a self-interested investor encourage the companies in which it invests to ‘internalise’ the negative social and environmental side-effects of supplying the goods and services that society apparently wants? There appears to be an inevitable conflict between the interests of responsible investors and wider society, at least in the short run, if those responsibilities are defined by fiduciary duty. Picking companies who are prepared to voluntarily shoulder a burden which might otherwise be imposed on society is not always compatible with the financial promises investors have made to their beneficiaries.
The investment industry is working hard to resolve this conflict. But it cannot be easily achieved without radically re-drawing the lines of responsibility or accountability. The oftentimes vague allusion to an investor’s ‘responsibility’ begs more questions than it answers. I would suggest we would do better focus on the latter and if investors do indeed perform a service to society, they do so rather in their role as ‘stewards’.
Under the new doctrine of responsible investment the set of criteria that qualifies the investment as a ‘winner’ has indeed been expanded. This in turn is gradually re-defining the content of the accountability relationship that exists between investee and investor. These relations are more properly expressed by the term ‘stewardship’. Thus, ‘responsible’ investors are increasingly encouraged in codes of best practice to hold corporations to account for all aspects of its past performance, both financial and ‘ESG’. But this does not entail any new obligation beyond that defined by its fiduciary duty which remains the same.
Using a different lens
The argument so far can be summarised thus:
- An investor’s primary obligation is defined by fiduciary duty
- Considerations of ESG are constitutive of fiduciary duty if it serves the interests of beneficiaries.
- That these also serve the wider interests of society does not establish a separate obligation.
- Fiduciary duty is elaborated in contractual arrangements across the entire investment chain.
- These arrangements establish the content of accountability relationships.
- A ‘stewardship’ relationship entails accountability towards wider interests.
Sustainable capitalism requires that the ethical principles of stewardship are first clarified and then codified in new institutional arrangements across the chain from investee to beneficiary. These must ask whether those that we have entrusted have acted as good stewards. This doesn't mean we must abandon the notion of fiduciary duty. Rather, it extends it. Indeed, we need not expect investors to shrink from the financial promises they make to beneficiaries. But a stewardship approach to investment relationships may establish investor’s wider obligations to society on somewhat firmer ground.
The challenge then lies in defining the true meaning of 'stewardship' in its moral and ethical sense, and what it means in practice. Viewing the investment landscape through a stewardship lens may urge a thorough-going re-examination of the moral values, purpose, goals and targets of corporations and investors alike. Finding new measures of success in meeting these goals is therefore an urgent task. Broader measures of performance or impact and a greater commitment to transparency will be required. These may widen our concept of investment 'value' from the flow of financial rewards to capital providers to the wider flow of benefits to society at large. They will not guarantee that narrow financial considerations will not dominate decision-making in the short-term. But they can only add genuine rigour to the greater task of finding sources of sustainable financial returns in the long-run. To this end, the advance of stewardship values through an effective system of mutual accountability and trust must lie at the heart of a new vision of sustainable capitalism.