Socially responsible investing & market risk

By Blaine Townsend
January 13th, 2012

One of America’s greatest strengths is its ability to balance populist ideals with capitalism—this is why America has always been a beacon of opportunity for people all over the world. Coming from the depths of a financial crisis into an election year, this ability will be severely tested. Fortunately, there is an example to follow: the socially responsible investment community.

"How companies mitigate their impact on climate change alone will be a defining issue for the market."For the past 50 years, socially responsible investment (SRI) professionals have looked at inequity in the system, environmental issues and corporate responsibility as investment issues. About a decade ago, they took it a step further and began looking at how these broad issues (environmental, social and governance policies) might affect systemic risk in the market. Having done so seems prescient now.

Mitigating risk has become a core argument behind the sustainable investing movement—often referred to now by the “ESG” moniker (environmental, social and governance). With intertwined global markets, massive leverage and counter-party exposure, it is hard to argue that poor corporate behavior doesn’t amplify risks in the market or produce social effects that can ultimately be a drag on the whole system. How companies mitigate their impact on climate change alone will be a defining issue for the market.

If it’s true that “Nature bats last,” everyone has a vested interest in extra innings.

ESG risk is now shaping corporate and investor behavior, and there are currently hundreds of companies that have better basic policies around ESG issues than the leaders in those areas just decades ago. And most of these policies are being driven by the companies themselves or the changing expectations of increasingly large shareholders, not government regulators. For example, the United Nations-backed Principles for Responsible Investment (PRI), which focuses on corporate engagement, was launched in 2006. Its signors now represent 20 percent of the world’s capital ($30 trillion).

So the general population, investors, and corporations are now converging on sustainability issues from different but related perspectives.

The flag of the Dutch West India company, one of the world's first multi-national corporationsAlignment between these groups has been a long time coming. Consider that the roots of corporate influence in America stretch back to the late 1600s when Dutch settlers erected a wall on what is currently Wall Street and literally occupied all of lower Manhattan. And unlike later religious immigrants, these settlers were actually emissaries of the Dutch West India Trading Company, one of the world’s first multi-national corporations.

You think modern corporate lobbyists wield too much power? These European trading companies were de-facto governments with sweeping powers, controlling economic systems, the slave trade and most of the world’s natural resources.

Although the American Revolution was a reaction to this system, even Thomas Jefferson could not sway his fellow patriots to get “freedom from monopolies” protected as a constitutional right. So the struggle to balance commercial interests with those of the individual is part of the American DNA.

What Jefferson and his colleagues did accomplish, however, was writing a constitution able to strike this balance. The U.S. Constitution protected individual rights at a level never seen before in human history, but also protected the rights of corporations behind Supreme Court rulings like Santa Clara Co. v. Southern Pacific Railroad in 1886 or Citizens United v. The Federal Communications Commission in 2010.

Thomas Jefferson helped craft the U.S. Constitution to protect individual rights as well as the rights of corporations.As a result, America became the most prosperous, stable and powerful country in the world. The benefits have been abundant and self-evident but by no-means equally distributed; The Congressional Budget Office recently reported that the top 1% of Americans based on salaries saw their incomes grow by 275% between 1979 and 2007, compared to just 40% for the middle 60% of wage earners.

So how do you build an overall system that balances commercial interests with the broader good? It probably is not by following the “Trust Busting” mantra of a century ago or by creating opaque systems of excessive speculation like the past two decades. Although both may seem like fun at first, they don’t work out in the long run.

The solution is probably more along the lines the sustainable investing model. Sometimes the answer is hiding in plain sight.

Tags:   capitalism   climate change   Environmental   ESG   Governance   investing   populism   responsible   social   socially   SRI   Thomas Jefferson   

Comments

Akara Draperon January 13, 2012 at 5:29 pm:

You da man, Blaine!! This was beautifully written. You are offering a balanced point of view, both radical and practical at the same time.

Blaine Townsendon January 25, 2012 at 6:42 pm:

Thank you Akara!

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