The 2008 financial crisis saw all eyes turning to bankers and investors. The recession posed
fundamental questions about the role of investors in society — both in terms of the investments they make and the manner in which they use their influence to ensure that the positive poverty reduction and development impacts of their activities are maximised and the negative impacts are minimised.
(Fiestas et al., 2010: 5).
Meanwhile, and more positively, the role of markets and the private sector in contributing to sustainable development has been increasingly asserted in recent years. Where the 1992 Earth Summit assumed that government...
The purpose of this review is to assess trends in the production, implementation and impact of investment principles, with a particular focus on international development and environmental objectives. The review considers the potential of investment principles to influence sustainable development outcomes, and makes some early recommendations on how to enhance this potential.
What are ‘investment principles’, for the purposes of this review? The Farlax Financial Dictionary (2009) defines ‘investment’ as:
The act of placing capital into a project or business with the intent of making a profit on the initial placing of capital. An investment may involve the extension of...
There are at least five dimensions along which sets of investment principles (IP) can be organised. These include:
1 The nature of the promulgating body — public or private.
2 The force of the principles — voluntary or mandatory.
3 The geographical application — global, regional or national.
4 The institutional scope — for all investors, or focused upon a particular type of institution such as banks, for example.
5 The range of issues, with all investments in developing/emerging economies at one end of the spectrum (that is, universal range), and investments in specified sectors at the other end.
In this section, we focus on implementation of four of the most important sets of principles — the PRI, the Equator Principles, the OECD Guidelines, and the IFC Performance Standards — and explore how they are implemented. Implementation is an important consideration because it shapes uptake, and therefore impact, of investment principles.
As discussed in Section 1, the PRI have more than 800 signatories from 45 countries, representing US$22 trillion of assets under management, or a little over a quarter of all conventionally managed financial assets. What does this mean in practice, however?
The first implementation step of the PRI...
Despite the huge range and scope of the various sets of investment principles, there is very little information about their impact. By ‘impact’ we mean improved social and/or environmental outcomes resulting from the investment that would not have occurred in the absence of the principles. This impact can be either positive (with good social or environmental outcomes) or negative (with less-bad outcomes than would otherwise have occurred).
This raises both conceptual and practical difficulties. First, there is the absence of a direct counterfactual: we are interested in the extent to which outcomes (and behaviours) have been changed by the adoption...
Financial criteria still dominate investment decisions. This review demonstrates that investment decisions are still governed primarily by financial criteria — even where investment principles are employed that emphasise other criteria such as social and environmental. Often such principles are implemented ‘where feasible’ or ‘where possible’, which tends to mean where ESG criteria do not compromise financial returns and the ability of investors to meet their fiduciary responsibilities. The vague nature of some of the principles, such as the UN PRI’s ‘incorporate ESG issues into investment analysis and decision-making processes’ also gives little clarity on how signatories should act: in this...