Mainstreaming Responsible Investment – A new report released by AccountAbility and the World Economic Forum offers the most comprehensive and incisive insight to date into the failure of the financial community to meet the needs of the real owners of capital through its unwillingness and inability to consider material social and environmental factors in investment decisions.
The report paints a picture of rising pressure for change in the financial community driven largely by the changing composition of corporate share ownership due to population aging and the related growth in private retirement savings. As Simon Zadek, Chief Executive of AccountAbility, observes, The real owners of capital in todays markets are you and me, the intended beneficiaries of the pension funds, mutual funds and insurance companies. The responsibility of institutional investors must be to meet our intrinsic interests. These go far beyond short-term financial returns, both because financial returns are effected over the long term by the investments social and environmental impacts, and because we depend on the long-term vitality and health of our economies, communities and the natural environment. Our interests must be that trustees and fund managers acting on our behalf take account of material social and environmental aspects of corporate performance.
The report entitled is the outcome of a series of three expert Roundtables during 2003 and 2004. The Reports findings have emerged from two years of in-depth discussions with practitioners. Its findings and recommendations draw directly from the perspectives of pension fund trustees and executives, portfolio managers of mainstream asset management firms as well as of buy-side and sell-side analysts.
Al Gore, Chairman of Generation Investment Management, commented, "incorporating social and environmental factors into investment decisions may seem exotic to some fund managers and pension fund trustees today, although certainly not to us at Generation. But there is no doubt it will be core to tomorrow’s successful investment strategies and practices. The AccountAbility/WEF report goes a long way in identifying the impediments to this process and how best to overcome them".
The reports proposals are aimed at both the investment community and governments. Patricia Hewitt, the UK Governments Secretary of State for Trade and Industry, writes in the report’s Preface, I very much welcome the work which AccountAbility and the World Economic Forum have done to bring together these different players I believe that the answers lie not in rethinking business and investment from scratch, but in the kind of improvements in knowledge and practice which are discussed in this report.
The report identifies key impediments to broader consideration of social and environmental factors by the mainstream investment community, and explores changes in policies and practices that could tip systemic change in the investment community in this direction. We found that the issue is decidedly not the personal values of these market participants but rather the framework of industry customs, structure, and regulation in which they operate. It is the combination of available information, participant competencies and, most of all, institutionalized incentives that drive behavior said Richard Samans, Managing Director of the World Economic Forums Global Institute for Partnership and Governance.
Mainstreaming Responsible Investment includes a series of recommendations for reform of industry practices and public policy. These draw upon chapters contributed by three distinguished expert practitioners from different segments of the investment value chain: Mehdi Mahmud, Executive Vice-President of Jennison Associates (asset management); Francis Condon, until recently Head of European Steel Research, ABN AMRO Equities (investment analysis); and Stephen Davis, President of Davis Global Advisers (pension fund trustee adviser), respectively.
The report outlines an agenda of reforms to realign incentives within the institutional investment community and strengthen its ability to produce and understand non-financial information that may be relevant to financial performance. Among the recommendations are:
Create an international set of good governance principles for pension funds akin to a corporate governance code
Increase the duration of asset manager mandates
Increase the disclosure of asset manager compensation structures
Develop new business models for research on non-financial issues by analysts
Re-evaluate the relationship and relative organizational standing of portfolio managers and buy-side analysts
Pay, train, and empower pension fund trustees more like corporate directors
Create a specific professional competency for non-financial analysis
Increase the emphasis on non-financial aspects of corporate performance in graduate business schools
Widen the dialogue between analysts and corporate investor relations officers on non-financial information