What is wrong with the Investment Industry?

A recent post which appeared on both Social Edge and ClearlySo infuriated my friends and colleagues from the Socially Responsible Investment (SRI) sector.  I suggested that they might actually be responsible for stifling the growth of impact investment.  By vacuuming up most ethically-motivated investment and building portfolios of the same old big-cap listed stocks, they hardly assist the impact investment cause—despite their name, how “social” are they?  Dutch bank Robeco and Booz Allen estimated this pool will be EU5 trillion by 2015 worldwide, as the responsible investment sector continues to grow at twice the rate of the industry, illustrating investor preferences for more than just financial return.  Why is there a shortage of products which provide genuine social impact as well as financial returns?

Charities and foundations have billions in their coffers; endowments which fund their good works.  In the USA they are obliged to spend at least 5% per annum of these annually on their mission, of which “mission-related investment” is included.  Elsewhere there are no such restrictions and, with limited exceptions, the money is invested in all the conventional financial assets, in pursuit of return-maximisation (a crash or two notwithstanding).  This is absurd; name another sector where at most 5% of assets go to the organisations’ chief objective.  If this were the corporate sector, heads would have rolled long ago.

Pension funds are similarly “conservative”, or traditional.  Even those with sympathetic constituencies put themselves into a similar “straitjacket”.  They argue their fiduciary responsibilities give them no choice.  This is hogwash.  Many of the bolder and more genuinely responsive and responsible organisations (such as TIAA-CREF in the USA or the Esmee Fairbairn Foundation in the UK and others) find they can undertake steps to address this absurdity by allocating assets to impact investment—it is time for others to follow.

Not only is the conservatism of today’s trustees probably contrary to their beneficiaries’ desires (who would, in many cases, trade off some financial return for social impact, if the question were properly put) but really rankle staff, who also have social motivations.

Shall we require investment firms to survey staff regarding these tradeoffs, the same way mandatory surveys check risk tolerances?

Should Government mandate a minimum impact investment threshold, well above the current 5% level?

Should consumer-protection agencies require that investment products marketed as “ethical” or “responsible” or “social” meet certain minimum standards, in the same way we require say chocolate manufacturers use a certain amount of cocoa?

First published in The Social Edge in September 2009.

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