Wonga, Welby, Values and Value

August 1, 2013 Categories: Investment Strategy

Russell Investments Wire - The pound over world

Justin Welby, Archbishop of Canterbury, raised a few eyebrows when he announced a strategy to put Wonga, the payday lenders, out of business. Whether the church will achieve that goal by helping an effective credit union sector develop remains to be seen.

Meanwhile, many investors feel able to ignore the whole responsible investment issue because they simply link it to soft ‘values’. And fiduciary duty has nothing to do with that, right? Wrong.

Those investors fail to differentiate between ‘values’ and ‘value’. Values have long been associated with Socially Responsible Investment (SRI). And many investors know SRI is not for them, with its potential exclusions of tobacco, alcohol, or perhaps payday lenders. They have a vague recollection of the Megarry judgment (Cowan vs Scargill) and just want good returns and the largest opportunity set of investments possible. But this line of thinking focuses on values, not on value. Or, more specifically, sustainable financial value. The 1000-plus investors, representing over $30bn of assets, who are signatories to the United Nations Principles for Responsible Investment have moved beyond this simplistic thinking.

Sustainable financial value lies at the heart of the long term savings and investment process. It is a key objective. The commitment by these UN PRI signatories to integrate ESG (Environmental, Social, Governance) factors into their investment decision making is rooted in the desire for good long term financial outcomes. Now, ESG factors can be viewed in several ways. A helpful perspective is that they can represent low probability high impact risks to portfolios. And though low probability, these risks may come to pass in the long term. So it’s common sense to manage them.

More subtly, there is a growing recognition of the true timescale of asset owners, representing millions of individual savers. It is often longer than the time horizon typical in the asset management community. Whatever your personal view on climate change, are you sure as a fiduciary you can ignore the risks to some assets in your portfolio from a realistic global price for carbon, from long term energy costs, from water security, and the related regulatory regimes which may be introduced? Many investors today would answer ‘No, of course we can’t ignore those risks’.

We tend to think of ESG integration in terms of portfolio effects. But there’s another strand of responsible investment work which we can describe as in the public policy domain. This is the area of the Kay Review in the UK. How can the savings and investment chain develop to better serve the needs of savers and companies? My colleague Sorca Kelly-Scholte wrote on this recently. How might regulation be framed so it encourages and supports good behaviour, rather than seeking to forbid bad? How might fiduciary duty be better interpreted to serve the beneficiaries of pension schemes? Leaders in the investment world are wisely assessing if any of the issues that brought banking to its knees have a resonance in their industry.

So, responsible investment won’t go away. For some investors it means applying their own values when they build their portfolios, as Justin Welby plans to do. But for a much larger group of investors it means identifying and managing risks, often long term in nature, to create sustainable financial value. That is what our beneficiaries, our clients, ask us to do.

Mike Clark – Director, Responsible Investment

Russell Investments Wire - Mike Clark

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