/ 17 July 2009

Responsible investment

There is worldwide concern that companies are feeling the pinch of the global economic slowdown so much that they are scaling down on their corporate social spend, including the critical area of green investment.

This comes at a time when, on the environmental front, extreme weather is on the increase as a result of global warming.

Five of the six hottest years since modern record-keeping began in the 1890s occurred in the past decade.

In 2005, the warmest year on record according to Nasa’s Goddard Institute for Space Studies, the world suffered more than $200-billion in economic losses because of weather-related natural disasters, making it the costliest year on record.

Loshni Naidoo, climate change and sustainability services manager at Ernst & Young, said companies are shifting their focus towards increasing operational efficiencies and cutting costs.

Research has shown that less beneficial projects, for example those focused on reducing the impact of the organisation on the environment, are often cut first.

Naidoo warned that cutting projects on improving environmental sustainability will result in companies being unable to comply with future environmental regulations.

”Companies will then be involved in a desperate scramble to comply and this is likely to involve additional cost and possibly penalties for non-compliance,” she said.

Dr Neil Eccles, acting chair of Unisa’s Centre for Corporate Citizenship, said there has been growing recognition in mainstream investment circles that environmental and social issues might also be financially beneficial.

Eccles said people across the world have collectively lost millions of dollars at the hands of chief executives who were consulted by everyone for their ”wisdom” on matters ranging from their core business to solving the world’s social problems.

Investors learned the hard way not simply to trust that corporate executives have shareholder interests at heart, said Eccles.

”Corporate governance scandals such as Enron showed investors that governance issues were in fact financially material.”

That is why investors are clamouring for reform, said Eccles. ”They are clamouring for a new and better way of doing things — a better way of doing business and investment in particular.”

This has paved the way for unbiased academic research on the responsible investment movement — in the broadest sense a way of investing in environmental, social and governance issues that make a difference.

”Long before the financial meltdown and this clamour began, the need to apply significant academic effort to the opportunities presented by responsible investment was recognised by Noah Financial Innovation and Unisa. This led to the establishment of the Noah chair in responsible investment within the Centre for Corporate Citizenship.”

There are many questions regarding this growing responsible investment ”movement”. There is concern that the emerging responsible investment style that has become popular in mainstream investment is actually no different from the greed-driven mainstream investment paradigm.

”The financial crisis shows that everyday people cannot trust the agents blindly. They begin to consider what their ‘best interests’ are and realise that the social issues such as poverty and environment degradation must be sorted out if their interests are to be protected,” said Eccles.

”The toolkit of responsible investment then becomes a key mechanism to make positive changes happen.”

Eccles hoped the Centre for Corporate Citizenship — located in Unisa’s college of economic and management sciences — will be geared to contribute to this debate.

The centre has three sponsored chairs — the Exxaro chair in business and climate change and the Noah chair in responsible investment, which have already done research in areas such as ethical consumer behaviour, including corporate citizenship in the curricula of business schools.