Limits of responsible investment

Rory Sullivan's new book about corporate responsibility reporting is worth a read. I have to say that the stuff I like best in it is where he is honest about the limitations of responsible investment, because few people are willing to say this stuff publicly. Like...

Even with the emergence of 'responsible investment' as part of mainstream investment strategies, the reality is that the positive outcomes that can emerge from the investor-company relationship are primarily those that are of benefit to companies and their investors: best risk management, better performance reporting and better governance, It is much more difficult for responsible investment to deliver outcomes that are primarily about improved social or environmental performance where there is no business case.

And the important point, as he makes elsewhere, that it simply isn't the case that all ESG issues are material. There's a bit of self-deception in the RI world that ESG issues play out over the long term. Sure, some of them do, but all of them? Is it really likely that all (or even most) issues are material, just over the long term? Not in my view.

And this has implications for public policy:

[P]olicymakers should take a cautious view on the role investors can play. Where there are clear short- and long-term policy drivers or other incentives 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 (ie when the business case is limited), investors are unlikely to take these issues into account in their investment research or to press companies to improve their performance on these issues. Expressed another ay, the experience with responsible investment suggests that government needs to ensure that appropriate regulations or prices signals are in place to drive behaviour; in the absence of these signals, investor engagement will inevitably be limited in what it can achieve.

Needs to be said, dunnit?