Compounding crises are what we’ve all been rehearsing for – now is the time for responsible investment
The role of responsible investment and sustainable finance in times of crisis.
By Simon O’Connor, CEO, Responsible Investment Association Australasia
As the globe comes to grips with the COVID-19 pandemic, the world of responsible investment and sustainable finance has been readying itself for crises such as this over some time.
Such scenarios are core business for responsible, ethical and impact investors, who spend much of their days analysing and assessing causes of disruptions to valuations that sit off the balance sheet: the environmental, social, governance and ethical issues that are fundamental to a holistic understanding of what moves markets.
We clearly live in unprecedented times, yet COVID-19, compounded on top of Australia’s summer of bushfires, is a full dress rehearsal for the types of shocks we need to prepare for more frequently in coming decades.
Beyond the initial crisis management, we need to start assessing our larger response, and our role within this, to ensure we are navigating such times to come out stronger and more resilient. There are a number of distinct areas that responsible investors and sustainable financiers should be considering right now.
At a microeconomic level
Within our investment portfolios, we have a critical role of oversight to ensure that our investee companies navigate this crisis with the highest possible respect for their stakeholders, and that they preserve capital in all its forms (financial, human, stakeholder) in order to re-emerge as strongly and quickly as possible. Investors globally are already busy engaging companies to ensure they are protecting and treating employees and their customers well, to ensure a faster company recovery over the long term.
At a macroeconomic level
It is now that we must be considering the broader systemic issues that will dictate just how deep the damage to our economies and societies is, and subsequently, the damage to our portfolios. As a responsible investment and financial services sector with a massive footprint across our economy, we have an obligation to help shape that broader economic system, to ensure our economies are resilient in times of crisis.
Right now, for example, we are reminded of how critical adequate investment (public and private) in health and in science is, and that we all suffer the results of their underinvestment. The recognition of how interrelated we are to broader macro themes and policy positions has driven many responsible investors to step up their focus on public policy advocacy in recent times. This is one of the key reasons the finance industry has come together under the Australian Sustainable Finance Initiative and New Zealand Sustainable Finance Forum to prioritise work in this area, and a major reason that RIAA prioritises this work (see recent ASFI statement on COVID-19).
Rebuilding trust
Whether banking, super and investment, financial advice or insurance – the financial services sector’s treatment and prioritisation of customers’ basic needs over this time will be the test of whether we can see a strong rebuilding of trust and faith in this sector. We have a very tangible role to play in influencing the health and wellbeing of citizens over coming months, and it is pleasing to see early signs of proactive work by our banking, super, KiwiSaver and insurance sector in this area.
Expectations of our sector
From the perspective of those whose money we manage, we must continue to keep a close consideration of what customers expect of us in the way we invest and lend. RIAA’s 2020 Australian consumer research highlights that 9 in 10 Australians believe our finance sector has a role to play in generating positive social, environmental and economic outcomes for the country, a role that extends well beyond merely investing and lending. This reflects a broader societal expansion of the expectations of business to deliver for society, not just shareholders, and underpins our licence to operate.
Our research across Australia and New Zealand shows us clearly that citizens expect their money – whether it be their savings or investments through superannuation or KiwiSaver – to be invested responsibly and ethically. The motivations to shift providers have never been greater either, as the majority of people now believe that ethical or responsible investments perform better in the long term.
A resilient and sustainable recovery
Finally, we need to have an eye on the post-COVID recovery phase, and ensure that any investment and stimulus is directed to re-building a healthier, more sustainable and resilient society and prosperous economy. Our recovery should not build it all back the same, but reflect the changed nature of the world we live in today and the coming decade, on in which the achievement of the Paris Agreement and the Sustainable Development Goals are critical factors that will determine our ability to weather future crises and to minimise the pain of those crises.
To do this well we need to have a clear plan for what principles should underpin our recovery. These Principles for a Responsible Recovery should include:
- Prosperity that is inclusive – is the recovery program focused on an agenda that drives inclusive growth, providing decent jobs for all, and with strong, universal safety nets?
- Principles grounded in democracy – does the recovery strengthen our democratic system including the information, networks and institutions critical to navigating crises, and reflect fairness, equality, justice and sustainability for all members of society?
- Participatory – does the response reflect the value of all citizens and all occupations fairly and appropriately, including the most vulnerable in society, and are we investing in supporting the occupations that have proven so valuable in times of crisis (such as fire fighters, health professionals and teachers)?
- Paris and SDG-aligned sustainability – is any recovery program informed by leading science, ensuring it works to align us with a net-zero pathway for 2050 and 50% reduction in emissions by 2030, that it avoids waste of any resources, and that it supports the achievement of the SDGs – all needed to provide the best chance of mitigating compounding impacts of climate, social and economic crises?
- Preparedness – does the program help future-proof our society, build stronger foundations to respond to future shocks and crises, not just in physical infrastructure but our systems, data, institutions, strengthening social cohesion and adequate natural capital protection?
I welcome your responses and suggestions to work to build these Principles out together.
RIAA operates with the mission to align capital with achieving a healthy and sustainable society, environment and economy. If ever there was a more important time when such a mission was required, I can’t think of it.