Mainstreaming Responsible Investing: Exciting times but big questions remain

RIWLooking forward to the 2014 Canadian Responsible Investment Conference next week in Toronto, the main event in the first annual Responsible Investment Week, it’s worth taking a step back to consider where the RI community stands today – and where it might be headed in the near future.

The inauguration of an annual, high-profile RI week is highly symbolic of the growing demand for RI knowledge, and the (dare we hope?) slow but steady movement towards ‘mainstreaming.’ The RI community and the sector it represents are growing. There is much to celebrate, but some big questions persist around what mainstreaming might mean, and what the future of RI should look like. What ESG metrics most pertain to different firms, industries, and portfolios, for example? Should ESG risk assessments be integrated into all financial analysis, or executed as an independent, second-level filter?

Perhaps the most pressing amongst such questions is the issue of what Responsible Investment in fossil fuels should entail. This is best represented by the growing debate over engagement vs. divestment.

350.og has led the call for widespread divestment from fossil fuel companies, a call which has been enthusiastically picked up by university campaigners, and one to which Shell recently felt the need to respond. Per 350’s Bill McKibben “The logic of divestment couldn’t be simpler: if it’s wrong to wreck the climate, it’s wrong to profit from that wreckage. The fossil fuel industry, as I showed in Rolling Stone last summer, has five times as much carbon in its reserves as even the most conservative governments on earth say is safe to burn – but on the current course, it will be burned, tanking the planet. The hope is that divestment is one way to weaken those companies – financially, but even more politically.”

Others highlight the threat of stranded assets and a potential carbon bubble, warning that rapid devaluation in a science-based, carbon-constrained future would leave pension-holders and other investors at risk. McKibben writes of Tom Steyer “Once the scientific research filters into the minds of investors around the world, the price won’t stand,” he says … As for those who think they’ll wait until the last minute, just before the carbon bubble bursts, “That’s one of the stupidest things I’ve ever heard. No one ever gets out at the top. It’s worth missing another couple of good years of Exxon to avoid what’s coming.”

On the other hand, many investors and observers argue that engagement is a better strategy to drive much-needed change. As a recent report from Oxford points out, there are likely to be no shortage of neutral buyers for divested assets. The direct financial effects of divestment are likely to be minimal at best, with the largest overall effect being one of “stigmatization” – reducing the social license of some fossil fuel players. Moreover, as Heather Hachigan and Priya Bala Miller of the Coalition of Universities for Responsible Investment point out, “Among the broader set of issues ignored by this campaign are the very real knock on impacts divestment could have on jobs and communities currently sustained by the fossil fuel industry.”

Indeed, not only is there a persistent need for energy growth (especially in the emerging economies) a great many jobs – and pensions – rely on the healthy functioning of the oil and gas industry – and on a healthy price for its stocks. Indeed, as we’ve seen, this is very much the point of many divestment campaigners, who argue that these assets are overvalued, and if stranded, would leave stockholders highly vulnerable.

That this concern is in fact common or shared is something that advocates of both engagement and divestment should recognize. What is needed is something resembling a ‘just transition’ in valuation, investment, and employment that coincides with the technical transitions to low-carbon technologies and energy production. Responsible Investment will play a critical role in how these transitions – social, technical, and economic – unfold. Advocates of both divestment and engagement should remember their common cause, and recognize opportunities for synergy in driving systemic change, while safeguarding profit.

Some may be skeptical of engagement strategies, distrustful of corporate partners’ true commitments to change, and asking ‘how can any investment in fossil fuels ever be sustainable or responsible when greenhouse gases are cooking the planet now!?’ Given some companies’ history of funding climate change denial and obstructing regulations, these concerns are understandable. Comparisons are often made to so-called sin-stocks that are common targets of negative screening, such as pornography and tobacco.

However, while it’s appealing to make analogies between oil use and the tobacco addiction, we must recognize that fossil fuel companies aren’t really like tobacco companies at all. While past divestment campaigns and ongoing negative screening have undeniably tarred the tobacco industry’s reputation and reduced its political capital, the fact is that the stability of the world economy was never tied to tobacco prices.

Engagement with fossil fuel companies can be far more than time-killing green-washing. RI investors are playing with increasingly big pots of money – and as ESG analysis goes mainstream, it’s being recognized as smart money too. The potential for tangible impact by engaging with shareholders, management, and boards of directors is large. Consider which would have the greater strategic significance for the low-carbon energy transition: Divesting from oil companies and – perhaps – knocking a few points off their stock price, or working with industry leaders to position them for collective advocacy on carbon pricing? Surely the latter, which would incentivize enhanced efficiency, innovation, and carbon reductions not only in the oil patch, but throughout the broader economy. Sound outlandish? It shouldn’t. Here in Canada, NEI is pursuing such a strategy right now.

Many questions remain about what it means to mainstream ESG – particularly with regard to those sectors of the economy – like fossil fuels – which seem most obviously tied to the status quo.

What seems clear is that RI and ESG needs, strategies and services will look very different for different players – there’s a lot of room for refinement, but also much room for diversity. In the case of divestment vs. engagement, this diversity of strategies might be good for the broader goal of better ESG risk analysis, better returns, and a more sustainable future. By imposing reputational costs on fossil fuel companies, divestment campaigners may just open up the space for engagement to flourish.

Events such as the Responsible Investment Week and the annual RI Conference are great opportunities to engage in these critical questions about what RI can accomplish, and to push the conversation forward. With a bold lineup of talks and events, it’s bound to be an exciting week!
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Aladdin Diakun is a researcher and analyst based in Toronto, Canada. He has previously published with the Centre for International Governance Innovation in Waterloo, where he worked on ESG risks in the Asia-Pacific, as well as on Arctic Governance issues. You can f0llow Aladdin on Twitter @aladdintweets