The recent oil spill off the Gulf of Mexico has dominated the news in the summer but while some claim that ethical investing provided protection from the financial hit of BP’s dividend cancellation, others have been left reeling in shock that their green funds did in fact have holdings in BP.
But it is time to move the debate beyond the different shades of green in ethical investment.
The oil spill is the latest in a growing list of avoidable environmental, social and corporate governance crises to have serious negative impacts on UK pension investments. In the wake of the financial crisis and as the evidence for the materiality of environmental and social risks becomes increasingly compelling, is a new awareness of the responsible investment credentials of investment products needed?
Responsible investment involves long-term investors engaging with their investee companies about financial risks arising from environmental, social and governance issues, where there is a business case for doing so. This is distinct from ethical investment – the positive or negative screening of companies or sectors – and it is also not just about specific socially responsible investment products.
Some of the key components of RI are reflected (to some extent) in the FRC’s newly published stewardship code, which emphasises the role of institutional investors as “stewards” of their investee companies, with a responsibility to take an interest in factors affecting company performance and to promote long-term value creation through engagement.
It is now widely accepted that one of the causes of the financial crisis was the failure of many institutional investors to adequately scrutinise the companies they owned. Risky business models and poor decisions went unchallenged, with devastating consequences for the economy – including for pension savers. RI has a key role to play in helping to future-proof investments against factors that can reasonably be expected to precipitate future financial or economic shocks.
Accordingly, IFAs should be scrutinising whether asset managers include RI and engagement (on often neglected environmental and social as well as governance issues) as a component of their products on offer, so that they can properly assess the risk profile of that product on behalf of their clients.
The Deepwater disaster has all too clearly shown that management of environmental and social risks is crucial for the management of financial risks. RI can help anticipate and potentially avoid future crises and, by including RI as a factor in your risk assessment, you can help ensure that you’re acting in your clients’ best interests.
To find out more about responsible investment, visit fairpensions.org.uk.