Sustainable and Responsible Investment works to correct market failure and to encourage investors and companies to address voluntarily their environmental, social and economic impacts. This voluntary action reduces the need for government intervention – and may be particularly helpful in areas where governments are reluctant (whether from complexity or prioritisation) to tread.
SRI should therefore be wholeheartedly welcomed and pro-actively supported by governments around the world. However, with a few notable exceptions, governments have conspicuously failed to engage with SRI effectively. To address this, we discuss below some broad options for government wishing to engage pro-actively with SRI and point them to further sources and points of contact.
Governments interact with SRI investment in three ways:
- As regulators and developers of policy for the financial services industry
- As asset owners / trustee of government funds (either government employee pension funds or sovereign wealth funds)
- As a developer / communicator of social, environmental and economic policy
As regulators and developers of policy for the financial services industry
One of the principal constraints on the growth of SRI is the lack of awareness by people and organisations who would be inherently supportive of it if they knew anything about it. In most cases, therefore, highlighting the existence of an SRI option (rather than the mandating of it) can be sufficient to support its growth. Government, as they set the context for financial sector regulation of all types, have numerous opportunities to ensure that an ‘SRI’ option is presented to potential suppliers and users of financial services.
Notably positive examples include: the UK Government’s Pension Disclosure Regulation that requires pension fund trustees to disclose the extent to which social and environmental factors are taken into account in the investment process
As asset owners / trustee of government funds
Whether as trustees of government employee pension funds or of sovereign wealth funds, governments are, of course, in a position to ensure that their own funds are invested in a manner that is consistent with their overall social and environmental objectives. In many cases, this does not require government to take new policy positions but simply to ensure that existing policy is applied through their investment practice as well as through their regulatory or legislative activity. (For example, it would be logically consistent for a government with an international climate change mitigation commitment to instruct asset managers to invest in line with that objective being achieved.)
Positive examples include the action taken by The UK Environment Agency, the Norwegian Oil Fund, some of the French government pension funds and some US state pension funds.
Notably, a number of Scandinavian government funds avoid investment in companies whose activities run counter to the countries international obligations or reputation (particularly on issues relating to climate change, human rights and cluster munitions).
As a developer / communicator of social, environmental and economic policy
SRI could be an extremely useful soft instrument of policy for government – particularly in areas where it wants to encourage voluntary private sector practice and avoid regulation or legislation. However, to crystallise the latent support of SRI for progressive environmental and social policy, government departments need become much more effective at communicating their research and policy intentions to the SRI community.
Few positive examples exist – although some work between the UK’s Department of Environment and the UK SRI community on climate change adaptation ventures into this area.
Government agencies and SRI communication
The SRI industry is not one of the primary stakeholders or communications targets for government (as their attention is more normally directed towards the political, commercial or civil spheres). However, it can be incrementally useful to them to promote discussion of their ideas and objectives within the investment sphere and to receive reciprocal feedback on the interest of capital markets in their activity.
Government departments can rarely justify the cost of maintaining their own SRI communications programme and therefore need to ensure that the engagement that they do undertake is as efficient and targeted as possible.
Advice on this is contained within our SRI-Dynamics discussion paper:
- Engaging SRI: top tips - (coming soon) which outlines to industry outsiders how to shape and communicate social and environmental news and research in a way that maximises its value to the SRI industry
