What is Responsible Investment?
Responsible Investment (RI) is about recognising that the impacts of corporations on the environment, on workers and on communities can seriously affect the value of our investments in them. RI also places a high value on companies’ own good governance.
Climate change, human rights, and directors’ remuneration are examples of environmental, social and governance (ESG) issues. RI offers us an opportunity to improve corporations’ environmental and social impacts while protecting the financial performance of our pensions.
How is it that a company’s environmental and human rights practices can have a financial impact? Poor environmental performance may result in compensation claims or costly clean-up measures. Exploitative labour practices may affect a company’s brand, reputation, worker productivity and ultimately its share value. RI argues that failure to adequately incorporate ESG issues within an investment strategy is both ethically and financially irresponsible.
RI differs from ethical investment, which generally focuses on excluding or including companies from an investment portfolio (“positive or negative screening”). RI, by contrast, involves investors using their shareholder power in the companies they invest in. They do this by voting at shareholder meetings and by directly talking to company senior management when ESG issues of concern have been identified. Action is taken by investors to improve corporate behaviour and to protect shareholder value.
FairPensions calls on investors to recognise their power and responsibility as shareholders to improve the behaviour of the companies in which they invest in order to bring about a better world and a more sustainable financial return for pension fund members. The ultimate sanction of selling shares may be necessary if the risk is sufficiently large and a company is unresponsive. Responsible institutional investors (including some pension funds) recognise that this active approach to being a shareholder enables them to fulfil their duty to meet the best interests of pension fund members.
Transparency is a key element of RI. Transparency, through public disclosure of, is imperative for demonstrating and exercising accountability. Lack of transparency makes it difficult for individual pension fund members to discern if fund managers making investment decisions on their behalf are addressing negative social and environmental corporate impacts and minimising the investment risks presented by corporate malpractice.