Rob Lake | 13 Jul 2018
In a recent article on The Remarkable Rise of ESG, Georg Kell, the founder and former CEO of the UN Global Compact, tells an insider’s story of the development and continuing acceleration of responsible investment over the last ten years or so. As Kell points out, ESG investing is driven by the recognition – broadening and deepening all the time – that ESG factors can be financially relevant. This captures the attention of investors in a way that ‘socially responsible investment’, resting on moral considerations and values, has never done. The future of responsible investment is assured, Kell suggests, because integrating ESG factors into investment decisions aligns them with the forces in society, markets and the natural environment that will determine which companies prosper in the years to come. I’m sure he’s right about this.
But I don’t think Kell tells the real inside story of ESG – what we might call the deep inside story. The deep inside story is in fact a story of morals and values: the morals and values of people within the investment industry and close to it who have worked so hard to uncover the financial relevance of ESG issues and to enable their colleagues to see it for themselves.
Financial relevance and materiality are not fixed or governed by the laws of the universe. Financial markets are products of the human mind. What we perceive and how we perceive it determines how we act in those markets.
As the pioneering psychologist William James said, ‘My experience is what I agree to attend to. Only those items which I notice shape my mind.’ If we don’t notice something – if we don’t pay attention to it - then by definition we cannot consider whether it is material. The story of ESG is the story of people who have directed their attention to environmental and social issues; explored their possible relevance to investors; developed analysis and arguments that demonstrate relevance; and communicated that relevance (materiality) to investors within their own organisations and beyond.And these people who have paid attention – and continue to pay attention – to sustainability are driven by their own deeply held values and their moral sense of what is right, by a desire to protect the environment and people, to make the world a better place.
They have shone a light in directions in which investors have not traditionally looked; and when you shine a light, you see new things.
It has become taboo to acknowledge it, but the story of responsible investment is a profoundly moral and values-driven story. Here’s just one example of the strength of the taboo. A (millennial) friend at an asset owner with a strong RI reputation told me recently that she was told very firmly by her new manager that she should not talk about ‘making the world a better place’ during working hours. That was something strictly personal.
The investment industry needs to look long and hard at its culture. The clients on whom it depends for its future – most notably millennials and women – are strongly focused on morals, values and purpose. It needs the full commitment and energy of the millennials in its workforce. The markets it invests in are moved by values that manifest themselves in consumer preferences and changing government regulation. And society at large is still not sure whether it can trust an industry that too often still struggles to demonstrate that it shares society's values.
The deep inside story of the rise of responsible investment is the story of people who care, motivated by their morals and values to find ways for investors to address sustainability issues in ways that make financial sense. To thrive in the future, the investment industry needs to overcome its fear of ‘making the world a better place’. It needs to demonstrate – to its clients, its employees and the society around it - that it is an industry that cares. It needs to put morals and values at the heart of what it does.