For almost 50 years now, I have been active in the world of responsible investment (otherwise known as sustainable investment, ESG integration, and impact investment, among other things). Its growth, especially since 2010, has surprised me. Assets under management in this once obscure discipline are estimated at as much as $37.8 trillion by year-end 2021.[i] Around the world, the field is exploding with new products, a deluge of data and heightened recognition from regulators.
I am particularly surprised at these developments given that since its earliest years, its practitioners have faced a barrage of criticism. The three prongs of these attacks have remained essentially unchanged over time. They are as follows: Those with pretenses to responsible investment are hypocrites, mouthing platitudes about creating a better world while not changing their fundamental practices. They are driven by their for-profit nature and supposed fiduciary duty to maximize returns at the expense of society and will forever leave a trail of destruction behind them. What’s more, they haven’t accomplished anything positive or of substance and never will; society’s biggest environmental and social challenges are just getting worse, and only government can help.
In the face of this litany of shortcomings, why has responsible investment managed such advances? What accounts for its present boom? Where is it heading? And most importantly: can it possibly bring its implied promise of fundamental change to the financial community or is that just a pipe dream?
To help resolve these conundrums, I find it useful to keep in mind the ever-shifting vocabulary that the field has used to describe itself over the decades and that have captured the essence of its purpose. These changes in naming record the totality of its motivations, ambitions and strategies as it has slowly gained traction.
In the 1970s and early 1980s, the first responsible investors were unapologetic about the ethical nature of their vision. The first serious book to define the field in 1972 was titled The Ethical Investor.[ii] My business partner Amy Domini named her 1986 book Ethical Investment.[iii] Founded in 1983, EIRIS, an acronym for Ethical Investment Research Services, was the first and long-dominant research firm supporting responsible investors in the United Kingdom.[iv] For these investors, ethical issues dominated their world: apartheid in South Africa, the war in Vietnam, racial and gender discrimination, environmental destruction and an all-out nuclear arms race.
The joke at the time was that “ethical investment” was an oxymoron. This reflected the financial community’s profound discomfort with the idea that making money and being ethical shared anything in common; indeed, an ethical consideration—acting morally—was often seen as a hindrance, not a help, in achievement of its primary duty: maximizing returns.
With the ethical door shut firmly in their face, these investors introduced two other descriptors in the late 1980s: “socially responsible” and “sustainable” investment. Surely, the financial community could at least recognize a general “responsibility” to society and an obligation to “sustain” life on Earth. The launch of the John Elkington’s consultancy SustainAbility in 1987 and the Domini 400 Social Index in 1990 were indicative of this change in description.
The mainstream financial community appeared somewhat more amenable to the idea that it had responsibilities to society and the environment: at least it should obey the law. Nevertheless, it found little to like in the concept that corporations’ responsibilities extended to other stakeholders than corporations’ stockowners or that the duties of investors transcended the performance of beneficiaries’ portfolios. Corporations must maximize profits for the sake of stockowners; investors must achieve the greatest possible returns for their beneficiaries’ accounts. End of story.
In the late 1990s and early 2000s, advocates of responsible investment and corporate social responsibility shifted their vocabulary once again—this time to stress the positive financial results of their approach: it can help returns and generate profits. They dubbed this phenomenon the triple bottom line and responsible investors argued that investing in companies with a best-in-class approach to social and environmental performance was a winning strategy. Elkington’s Cannibals with Forks: The Triple Bottom Line of 21st Century Business appeared in 1997. SAM Group Holding, an early advocate of the “best in class” investment philosophy, was founded in 1995.
This contention upended the mainstream financial community’s longstanding argument that limiting one’s investment universe, as a “do no harm” approach implied, precluded the theoretical risk-adjusted benefits of maximum diversification and would lead to “suboptimal” returns. However, twenty-odd years of evidence argued otherwise: responsible investors could produce competitive returns; environmental, social, and governance (ESG) factors were, under certain circumstances, material to stock price valuations. Backed by a preponderance of academic research, this argument gradually won the day. ESG integration into security selection has now become a broadly, if not universally, accepted practice in the mainstream investment community.
This was a victory of a sort but opened the door to two other criticisms of responsible investment. ESG factors may help stock picking but does identifying stocks that will go up lead to quantifiable, measurable social and environmental benefits on the ground? To answer this question, the vocabulary and practice of impact investment was introduced in the late 2000s with a nudge from the Rockefeller Foundation and the founding of the Global Impact Investing Network (GIIN) in 2009.
Demonstrating that financially viable investments can have demonstrably measurable positive social and environmental outcomes is impact investment’s goal. GIIN’s IRIS + metrics assess the social and environmental benefits of specific investments. They lay claim to being “the generally accepted system for measuring, managing, and optimizing impact.”[v] The Impact Management Project was created in 2016 to develop a consensus on principles for assessing the impact of an investment, including its “five dimensions”: the what, who, how, contribution and risk. Specific securities and the portfolios of which they are a part could now be rated and ranked on social and environmental impact.
Despite progress on the measurement front, this accomplishment left the door open to yet another attack. What good are individual investments that create socially and environmentally beneficial portfolios if they do not bring about transformational change at the system level? Clean portfolios may help individual investors “feel good” but, as to tackling climate change, biodiversity loss, income inequality, gender and racial discrimination and the like at their core, do they really make a difference?
To contend with this knotty issue, over the past half dozen years a vocabulary around investments’ impacts on social and environmental systems themselves has emerged. Since its founding in 2015, The Investment Integration Project (TIIP) has worked to define system-level investing and describe the tools it has in hand.[vi] System-level investing applies in those special cases of global social and environmental risks that threaten the economy as a whole, impacting assets across all classes and undermining the basic portfolio-management tools of diversification and hedging. It extends investors’ management of risks and corresponding rewards beyond the stewardship of portfolio assets alone to preservation and enhancement of the fundamental societal and environmental systems necessary to support all assets and a prospering society as well.
In 2020, the CFA Institute called out “system-level thinking” as one of the six actions needed for future progress in sustainability in investment management.[vii] The International Corporate Governance Network’s Global Stewardship Principles calls on investors to “build awareness of system-level threats.”[viii] The UK Stewardship Code 2020 states that asset owners and managers play a key role “in working to minimize systemic risks.”[ix] Consideration of this broad approach when confronted with system-level challenges has begun to take hold.
Despite these twists and turns, responsible investment remains subject to unrelenting skepticism from various parties. At the same time, the acceptance of responsible investment by others continues to accelerate until now it is knocking on Wall Street’s front door. What accounts for this curious, divergent situation?
I offer a two-fold explanation. First, responsible investment has never failed to ask fundamental questions about the nature, scope and goals of investment itself: its relationship to ethics, responsibility, sustainability, return, impact and the health and preservation of underlying social and environmental systems. This is useful. In addition, the increasingly complex, interconnected and populous world of the 21st century has made these questions of ever-greater concern. This is compelling. Hence the demand from the public: finance is powerful; challenges are great; do your part.
Second, responsible investing has yet to fulfill its promise. This is understandable. Breaking new ground is tough. Old habits die hard. Transitions are painful. Moreover, investors’ work in addressing 21st century challenges does not replace their daily demands of portfolio management. It complements them. Systemic challenges are a special case, demanding new perspectives that do not replace the old. This is confusing. Even worse, systemic challenges impact all investors, not just a class dubbed “responsible.” This is bad news for the unconvinced. Hence the criticism from the mainstream: we never had to do that before; we don’t know how to do it now; you haven’t shown us the way.
To fulfill the implicit promise of responsible investment—that is, to demonstrate how it can help society contend with the greatest of the 21st century’s challenges—the financial community must take three bold steps. Investors must recognize and clearly state their belief that fundamentally new challenges exist. They must be smart about what tools and techniques they develop to address those challenges and the new rules by which this game is played. They must agree on how to score an investor’s winning tactics and measure their contribution to the common good of contending with risk management at system levels. Beliefs. Actions. Measurement.
It has taken 50 years for investors—all investors—to reach the point where they acknowledge this emerging aspect of their discipline. It has taken decades of rethinking and renaming for investors to understand that they can appropriately play this new role. It has taken the unfolding of crises of a new sort—from the previously inconceivable facts of climate change to a new perception of what national income inequality means throughout the world—to place in boldface the nature of this needed change.
The investment community is now at a crossroads: either it sees clearly where it stands and will respond in ways that can address the criticisms of the past 50 years or it continues to dismiss as impossible a meaningful role for finance along with that of government and civil society in contending with the greatest challenges of our times. The choice that investment as a discipline makes at this juncture is of the moment and will be momentous.
[i] Bloomberg Intelligence. “ESG Assets May Hit $53 Trillion by 2025, a Third of Global AUM” February 23, 2021. Accessed at https://www.bloomberg.com/professional/blog/esg-assets-may-hit-53-trillion-by-2025-a-third-of-global-aum/ August 31, 2021.
[ii] John G. Simon, Powers, C.W., and Gunnemann, J.P. The Ethical Investor: Universities and Corporate Responsibility (New Haven: Yale University Press) 1972.
[iii] Amy L. Domini with Kinder, P.D. Ethical Investing (Reading, MA: Addison Wesley Publishing Company) 1986.
[iv] EIRIS is now part of VigeoEIRIS, acquired Moody’s in 2019.
[v] Landing page of the IRIS + website. Accessed at https://iris.thegiin.org/ on August 31, 2021.
[vi] I was a founder of TIIP and advocate for its vocabulary. See TIIP’s various publications available at https://www.tiiproject.com/resource-hub/
[vii] CFA Institute. Future of Sustainability in Investment Management: From Ideas to Reality (Charlottesville, VA: CFA Institute) 2020:52.
[viii] International Corporate Governance Network. “ICGN Global Stewardship Principles” (London: International Corporate Governance Network) 2016:18.
[ix] Financial Reporting Council. ”UK Stewardship Code 2020” (London: Financial Reporting Council) 2020:4.