Investing for sustainable development?
Principles intended to encourage socially and environmentally responsible investments generally fail to do so, according to the first comprehensive review of their use — published by IIED.
A growing number of investors have signed up to such principles for various reasons, from improving reputation to minimising risks and improving long-term investment prospects. But these investment principles are generally too weak and vague to overcome the basic tension between profitability and both sustainability and equity.
The report assesses the content, take-up, implementation and impact of various sets of principles, with a focus on: the UN Principles for Responsible Investment (PRI); the Equator Principles, the Environmental and Social Principles of the European Investment Bank (EIB); and the OECD Declaration on International Investment and Multinational Enterprises.
Some principles, such as the PRI, allow scope for particularly lax interpretation – the UN PRI ask for the “incorporation of ESG [environmental, social and governance] issues into investment analysis and decision-making processes” but offer no more specific guidance than this. Should, for example, investors screen out investment opportunities (either positively or negatively) or engage with those who are underperforming on ESG issues to help them improve? In most cases, detail is lacking.
Most of these principles (except the EIB’s) explain what should not be done, rather than what should. They differ in the extent to which they include environmental criteria, and according to the type of investment concerned. For example, the Equator Principles focus on project finance and so emphasise local community consultation and participation far more than do the PRI, which are used for arm’s-length investments.
It is easier for some actors than others to abide by investment principles. A non-private company, such as the EIB (backed by resources from the EU), can secure a lower financial rate of return in order to promote positive outcomes in terms of sustainable development. Similarly, ethical investors have been explicitly tasked with integrating non-commercial principles into investment decisions and can accept a lower rate of return on their investments. By contrast, a bank answerable to shareholders must seek to maximise returns and the dividends it pays, or risk losing business.
At present, there are many barriers to uptake of investment principles – such as the costs of implementation, the difficulty in applying principles to some asset classes (such as passive and pooled funds, where investors are more ‘removed’ from their investments), a lack of internal incentives and staff training to encourage implementation of the principles, and a lack of resources. Further, a lack of transparency and disclosure in the application of some sets of principles makes it very hard for outsiders to hold signatory investors to account. The number of third-party assessments of the impact of investment principles is surprisingly limited and there has been no attempt to compare across the range of principles to assess relative impact.
For all of the reasons listed above, these principles encourage only minor alterations to investment decisions, within commercial constraints, rather than altering the underlying basis of decision-making. They serve as aspirations rather than requirements and although they may encourage efforts to mitigate the worst effects of investments they don’t prevent damaging investments from occurring in the first place.
Until all investors sign up to a common set of investment principles there is a commercial incentive for current signatories to adhere to only minimum requirements. Going beyond the bare minimum would put competitors at a competitive disadvantage. Investors will not compromise high returns on investments for improved outcomes in terms of sustainable development
The potential for investment principles to support sustainable development is not yet being realised. Not everything can be a 'win-win' for business and sustainable development and to pretend otherwise distracts attention from other approaches that will be needed if the stated objectives of principles for responsible investment are to be achieved.
These findings shouldn’t be used as a reason for investors to disengage with the principles. Rather, better monitoring and measurement of the impact of investment principles, greater transparency, as well as a better understanding of the broader institutional changes required to support the principles is needed.
With such improvements the next generation of investment principles should be more ambitious and more powerful in bringing about investment that supports, rather than undermines, sustainable development.