A Question Whose Time Has Come?

The CEO from the mining company gave a glossy presentation in a swish office in London about their CSR (Corporate Social Responsibility) policies, and some of the excellent work that they do with communities in southern Africa where they operate mines. The impression he left was of a responsible company taking care to leave these poor rural communities stronger as a result of their activities.

By coincidence, in the room was the Bishop of a diocese in southern Africa. He stood up and, gently but firmly, pointed out to the CEO that the story he was telling was rather different to the experience of his parishioners. As the fascinating discussion unfolded, it became apparent that the CEO was seeing what he wanted to see – and had some data whose purpose was to paint the picture he wanted to believe.
As African bishop gently held up a mirror to the CEO, we all had the awkward experience of watching it dawn on him that what he saw there was different to the image he had of himself printed in his corporate brochure.

There is nothing wrong with mining companies – the computer on which I tap and the phone on which I speak could not be made were it not for mining. But there is a difference between Mining Company A that leaves behind a smouldering hole in the ground and poisoned communities, and Mining Company B that cleans up after itself and leaves communities equipped to face their future. Although there might be nothing to choose between the heart-warming pictures in their CSR reports.

As an investor, we are happy for our capital to be put to work by Mining Company B, but we do not want to be an owner of Mining Company A.

To state the obvious, all capital has an impact. It seems perfectly reasonable and natural for us to want to know – as an owner of capital – what the impact of our capital is. Especially now that, on the one hand the resource constraints of our world are becoming ever more evident, and on the other it is becoming ever clearer that some businesses are net contributors to the sum of human distress.
So we would have thought that the asset management industry would be able to accommodate this desire.

Not so. Or, at least, not yet. Quite the opposite, in fact. When one asks this question, one enters an Alice in Wonderland world characterised by cocked eyebrows and My Dear Chap. It’s more complicated than it looks, you know. But once you’ve got through all that, the central response is, reasonably, that ‘it simply is not a question that our clients have ever really wanted us to answer’.
It can be deeply discouraging to embark upon a search for a diversified and asset-allocated asset management solution, that enables the asset owner to take stewardship responsibility for the assets that they own. The orthodoxy is that – as long as it is legal – why would you focus on anything other than maximising your financial returns? In fact, you are – in perception at least – legally obliged to do so.

The law, and its regulation, have become the authority that sets the standard of what is acceptable. But the law is not interested in impact of capital. It is interested in protecting investors from fraudsters, and (to some degree) protecting domestic citizens. It has no interest in the social impact of UK-managed investments in other parts of the world. That, of course, is a matter for the local authorities there, in the context of international law. Anything goes, and it is up to the local authorities to stop it.

Much has been achieved by the responsible investment industry over the last 30 years. Initially, negative screens were developed – you could opt out of things that were seen as bad, such as arms manufacture, pornography, alcohol, tobacco and so on.

Then, additional criteria were added to assess the governance of these companies and the degree to which they were signing up to codes of conduct and so on. This fell under the heading of Socially Responsible Investment (SRI), which has evolved into Environmental, Social & Governance (ESG) considerations. Initiatives such as United Nations Principles for Responsible Investment (UNPRI), the UK Stewardship Code and the forthcoming IR (Integrated Reporting) have given more strength and meaning to these areas.

These are great leaps forward with genuine merit in their own right. But they may yet come to be seen as baby steps in the context of the big question increasingly being asked: What is the social impact of my capital?

The asset management industry has astonishing intelligence gathering & processing capability. The armies of analysts employed to pore over every detail & risk of a company are more than capable of understanding the impact of each company – of distinguishing between Mining Company A and Mining Company B. So why is there so little offering me, an asset owner, an asset management solution to invest in one but not the other?

The answer, of course, lies with me – or rather, with asset owners more generally. Have we asked them? Do we expect them to develop this kind of thing in a vacuum, in isolation of demand? If asset owners are only asking them about returns and risk, why would they divert any of their analyst resource to considering questions of impact? And why, ultimately, as an asset owner would I do that? Do I have the energy to engage in the systems change (e.g. perceived definitions of fiduciary duty) that is required to make this possible? On top of my day job?

If an impact lens is to be applied by asset managers as a matter of course (in just the way as a risk & return lens is applied), then asset owners need to ask this question together, in a concerted way which demonstrates to asset managers that their future prosperity relies on their effective response. We know that it isn’t beyond the wit of the asset management industry to do this if they are asked.
The question that asset owners need to ask themselves is whether they want them to.

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