End of the beginning for responsible investment

Recent reflections on this month’s five-year anniversary of the Lehman Brothers collapse have focused on a variety of developments since the crisis: from reform to remuneration, sovereign debt to shadow banking, and from offshore tax to the Occupy movement.

However, one significant area that has been largely overlooked has been the rise of sustainable and responsible investment among the institutional investment community.

Since the global financial crisis struck, the responsible investment industry has grown rapidly into mainstream finance. For example, in 2008 the United Nations-backed Principles for Responsible Investment (PRI) had around 350 signatories. They’ve now tripled to over 1,200 signatories, who are estimated to manage around a fifth of the world’s capital. We’ve also seen the wide adoption of stewardship codes in the United Kingdom and elsewhere, along with voluntary and compulsory regulation to encourage transparency.

Even the banking sector has been working on its sustainability. EIRIS has extracted data from its Global Sustainability Ratings to compare the environmental, social and governance (ESG) risk management score of the banking sector and found that it has risen over five years from 2.79 to 3.06. This score is based on criteria that assess how well the board and senior management address company-wide ESG risks and opportunities at over 150 of the world’s biggest banking institutions.

That analysis is good news for institutional investors – it shows that reforms have helped make the banking sector safer and more sustainable – but it also needs to be put into context. The average sustainability score for all sectors is actually 3.3, which means that the banking sector still performs worse on sustainability than many controversial sectors such as pharmaceuticals or oil and gas. That may help to explain some of the continuing flow of ethical lapses that the sector has faced in the last few years, from LIBOR fixing to money laundering.

Another anniversary this month shows that the rise in responsible investment also needs to be put into context. That it is actually part of a longer term trend, which still has some way to run.

30-years old today

Thirty years ago today, EIRIS, the organisation I work for, was formed, helping give birth to the ESG research industry in Europe.

Back in 1983, responsible investment as we know it barely existed. Thirty years ago, we had just one asset management client (the Friends Provident – now F&C – Stewardship Fund) and it was a challenge to find any corporate information on sustainability. Now we serve 150 institutional investors and research around a million sustainability data points each year across 3,000 companies spanning 46 countries.

This sort of growth has not happened only as a response to the financial crisis. The global downturn, sparked by Lehman’s collapse, has been more of a catalyst than a creator for the boom in responsible investment.

As is the case with the banks and sustainability, there is also still a long way to go when it comes to institutional investors and responsible investment. Research by the PRI in 2011 showed that despite the large number of institutions it had signed up, still only 7 per cent of the global market was subject to ESG integration by its signatories. That’s a figure I’ll be attempting to drive up following my election to the PRI’s advisory council this month.

In the next five years responsible investment needs to make even faster progress. Rising global demand for food, energy, living space and water, as well as the challenge of dealing with climate change, mean sustainability issues will only become more material to mainstream investors in the years to come.

Banks and institutional investors alike still need to show that they can manage ESG issues in a way that makes individual portfolios, and global finance as a whole, much safer for the benefit of all participants in the investment chain.

Peter Webster is chief executive of EIRIS, an ESG research agency dedicated to empowering responsible investment. For more information visit eiris.org or follow on Twitter @EIRISNews