How investors are setting a very different agenda for responsible investing

September 18, 2020

Responsible Investing or RI has always been based on a yin and yang relationship between core values and financial returns. At inception, the RI movement was very much values-driven, focusing on exclusions of companies like tobacco and weapons. More recently, there has been a shift toward a more rigorous framework of measuring financial performance against environmental, social and governance or ESG factors. Now there’s a new RI consideration that’s gaining traction: enabling purpose.

When investors demand more, companies tend to listen. In early 2018, Larry Fink, the CEO of BlackRock Investments, told the leaders of the companies BlackRock invests in that they need to do more than deliver value to shareholders. He asked corporate leaders to “publicly articulate their company’s strategic framework for long-term value creation.” Essentially, the head of the world’s largest asset manager told companies they need to lead with a broader social purpose and deliver value for all stakeholders, including employees, shareholders, communities, and customers.

While what is known as ‘stakeholder capitalism’ has always been foundational to RI, Fink’s pronouncement felt like a watershed moment for the mainstreaming of the movement. Since then, a global pandemic, extreme weather events and roiling social issues have accelerated the need for companies to pay attention to all stakeholders. Many companies have now declared their intention to lead with purpose and connect that purpose to the desires of their customers.

Two ways to make a difference

This development speaks to the growing need of consumers, including investors, to make a difference – to also lead with purpose and take active responsibility for change. For investors there are two ways to do that. First, they can choose to invest their money in RI solutions that hold purpose-led companies, rewarding those that meet a set of criteria for ESG issues.

Second, investors can use corporate engagement to influence companies to do better across a range of ESG factors. How? By investing their money in RI funds that specifically use corporate engagement to address environmental, social and governance risks companies face – risks those companies may not even be aware they have.

The first approach – investing in ESG leaders – allows investors to delegate their purpose to the companies they invest in. The second approach, where corporate engagement gives investors a ‘voice at the table’ with the companies they own, enables their purpose. And it is this ability to enable investor purpose that makes RI such a powerful tool for change.

Investing to enable purpose

A recent study from behavioural finance consultancy Oxford Risk looked into the personality dimensions of investors and the investment solutions that best align with their attitudes. What this research uncovered was a shift in attitudes among those investors who favour what Oxford calls ‘impact trade-off’. These purpose-focused investors actually prefer to invest in companies that lag behind in sustainability rather than investing in sustainability leaders. They are comfortable giving up the investment benefits of strong ESG performance to instead drive positive change.

Do all investors feel this way? No, not yet. But as more investors reconsider what they want of out their investments, we can expect them to demand purpose enablement in addition to investment returns.

“Purpose-focused investors actually prefer to invest in companies that lag behind in sustainability rather than investing in sustainability leaders.”