Responsible Investing, or RI for short, is one of latest buzzwords in the financial sector. As corporations find themselves under scrutiny for their business practices as far as legal, social, and environmental factors are concerned, does RI provide investors with a tool to measure the ethical conduct of the companies they entrust with their capital – and does RI necessarily produce better returns?
The Rise of Responsible Investing
Over the past decade-and-a-half, the global economy has faced several serious challenges that put the business practices of large corporation in the spotlight – mostly for all the wrong reasons.
The Enron scandal of the early 2000s, followed by an increased awareness of environmental damage caused by industry and pollution, and the social impact of corporations from developed nations relying on cheap labour in the developing world have raised awareness about how corporations make their profits. Following the financial crisis of 2008, finance executives on Wall Street and beyond have been criticised for their sometimes unethical business practices and excessive risk taking.
In the wake of this new awareness about corporate business practices, many investment companies, governments, and corporations themselves are insisting that corporate business be done transparently, and to the benefit of society, without harming the environment – Responsible Investing involves buying equity in listed companies that comply with these requirements.
Does Responsible Investing Produce Results?
Although few people would argue that transparency, social awareness, and environmental friendliness are bad things in themselves, some financial experts are questioning whether corporations can successfully comply with these requirements and still carry out their primary function – making profits and providing competitive returns to shareholders. While many companies appear to “tick all the boxes” where RI is concerned, their actual performance may not necessarily be better for it.
While executive meetings are held in countries across the world, including South Africa, to address issues relating to Responsible Investing, some executives have argued that this time may be better spent optimising the running of their companies. There is also a worrying trend in South Africa at the moment – retiring executives are reluctant to stay on the board in non-executive capacity even though many of them are in excellent health. Some of these executives cite the huge focus on Responsible Investing, which includes lengthy debates and engaging with stakeholders, as a reason for their decision not to stay on – it seems that with the huge focus on RI, corporate business just isn’t as personally rewarding as it used to be.
While RI may be successful in securing a better world for our children, the short-term difficulties involved in the process will have to be ironed out before this new set of criteria becomes the benchmark for measuring the attractiveness of a company as a new investment.
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