Start a conversation with anyone about responsible investing today and within 30 seconds you get: “Hang on. Let me just clarify what I mean by responsible investment…” The language around this space – whether that be ESG, SRI, sustainable investing, responsible investing, impact investing, ethical investing etc etc – is so diffuse, it has become its own worst enemy.
At the heart of this whole notion is one simple principle: Long-termism.
The further down the road you look, the more the shape of the path and the eventual destination matter.
Is the world or economy going to be fundamentally different in one year? Baring another 2008-style apocalypse, the answer is hopefully no. But is the world going to be fundamentally different in five or ten years? I hope so, yes.
We simply cannot go on as we currently are. We are using up natural resources at a much faster rate than the planet can replenish; climate change is compounding the problem; our population is growing, getting older and moving around; technology is changing jobs, educational needs, our consumption habits and, perhaps most importantly, how well we understand the scale of the sustainability problem.
Why does this matter in the context of investment? Because given enough time, all of these challenges will shape our economy. In other words, they will alter the direction of the path and where it ends up. So if you’re a long-term investor, you have to account for sustainability at the heart of your investment process.
So why is the taxonomy issue so important? Because it slows us down. The more diffuse the language, the more diffuse the approach and, as a result, the less capable financial markets are of effecting any real influence on companies. And those companies really matter because they are the mechanism through which we arrive in a more sustainable economic model.
To get there, we – as investors, economic participants, savers, parents and children – need to mobilise as much capital as possible in a collective effort. That means alignment of thinking. The more investors punish companies with poor ESG ratings, the more those companies will suffer in terms of valuation. The more we reward the leaders, the clearer the signal to the corporate world that sustainability is important to our long-term financial (and non-financial) wellbeing.
If we fail in this collective effort, governments and civil society will do it for us. And that is going to hurt more. It opens our portfolios to a heightened risk of shocks. Companies, after all, tend to move more like tankers. So if the path quickly diverts to avoid a social or environmental road block, some will end up off the road. Bell Pottinger and The Weinstein Company stand testament to how fast that derailment can happen today.
We need the path to bend slowly and the tool for achieving that is common language. A standard lexicon would give us a shared understanding of sustainable risk and return, which can then be translated into market valuations.
It also gives us a framework around which we can begin the process of gathering really meaningful data, and filling in holes where needed, so we are actually able to measure real progress. By doing so, we can build a set of metrics that can hold their own against the harsh numeracy of annualised returns and standard deviations. And then we can hold the laggards to account in a way we simply cannot today.
If we can achieve that common language, we stand a chance of arriving at our destination without too many derailments along the way.
Unfortunately, however, we cannot afford to wait for the taxonomy to standardise before we take action. We’re going to have to navigate the path into foreign lands and learn the language as we go.
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A quick cuppa with Faith Ward, Chief Responsible Investment and Risk Officer, Environment Agency Pension Fund