Principles for responsible investment fail to support sustainable development
Principles intended to encourage socially and environmentally responsible investments generally fail to do so, according to the first comprehensive review of their use — published today by IIED.
A growing number of investors have signed up to such principles for various reasons, from improving reputation to minimising risks and improving long-term investment prospects. But the review concludes that investment principles are generally too weak and vague to overcome the basic tension between profitability and both sustainability and equity.
“The proponents of different sets of principles have long expounded their potential to improve outcomes,” says author Eva Neitzert from research consultancy Just Economics. “But in general principles encourage only minor alterations to investment decisions, within commercial constraints, rather than altering the underlying basis of decision-making.”
The review concluded that until all investors sign up to a common set of investment principles there is a commercial incentive for current signatories to adhere to only minimum requirements. Going beyond the bare minimum would put competitors at a competitive disadvantage. Investors will not compromise high returns on investments for improved outcomes in terms of sustainable development
“The principles tend to serve as aspirations rather than requirements,” adds Neitzert. “Principles may encourage efforts to mitigate the worst effects of investments, but they don’t prevent damaging investments from occurring in the first place.”
Neitzert assessed the content, take-up, implementation and impact of various sets of principles, with a focus on: the UN Principles for Responsible Investment; the Equator Principles, the Environmental and Social Principles of the European Investment Bank (EIB); and the OECD Declaration on International Investment and Multinational Enterprises.
Most of these principles (except the EIB’s) explain what should not be done, rather than what should.
“The potential for investment principles to support sustainable development is not yet being realised,” says Neitzert. “Not everything can be a 'win-win' for business and sustainable development. To pretend otherwise distracts attention from other approaches that will be needed if the stated objectives of principles for responsible investment are to be achieved.”
To encourage investors to consider more than purely commercial and short-term gains the authors call for better monitoring and measurement of the impact of investment principles, greater transparency, as well as a better understanding of the broader institutional changes required to support them.
With such improvements, they says, the next generation of investment principles should be more ambitious and more powerful in bringing about investment that supports, rather than undermines, sustainable development.
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This research was funded by IIED’s Joint Framework donors DFID, DGIS, Danida, SIDA, NORAD and Irish Aid.
Just Economics is a research company that uses interdisciplinary techniques to address economic injustice and achieve progressive and sustainable change. See www.justeconomics.co.uk
The International Institute for Environment and Development (IIED) is an independent, non-profit research institute. Set up in 1971 and based in London, IIED provides expertise and leadership in researching and achieving sustainable development (see: www.iied.org).
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