Recently Oxfarm issued a report on Responsible Investments a two year project with the participation of a wide range of portfolio companies, institutional investors etc. They have done a thorough job on analyzing and investigating the impact that responsible investments have, or should have on poverty reduction. There is no doubt that intuitional investors would, if they pooled their forces, have a significant impact on poverty reduction worldwide. As Oxfarm states they are a Rights based organization, meaning that they believe that investors should take responsible for their investments impact in relation to Social, Environmental issues. This of cause also means that they believe that organizations have a obligation to act and respond responsible towards their stakeholders.
I have quoted the issues that Oxfarm have identified in relation to institutional investors for you to see.
• The lack of oversight by asset owners of the manner in which their investment managers take account of environmental, social and governance issues – and how they impact on poverty and sustainable development outcomes in their investment practices;
• Short-termism, in particular the striking disconnect between the very short-term horizons of most institutional investors and the much longer timeframes required for the realization of poverty reduction and development goals; and
• The general lack of transparency within the investment community, most notably in the context of this project, the lack of information from the majority of investors on their approaches to responsible investment.
I think that the Oxfam report highlight several issues that investors, civil society and governments are fazing in these difficult times.
As governments have fewer funds to allocate to development projects in general NGO are increasingly looking for other actors to take over some of the roles that they used to have. Oxfarm wants Institutional investors to take a greater role in the reduction of poverty but they want to have governmental oversight of the allocation. I see this as a symptom of the crisis in the development world. In Scandinavia alone we have seen a dramatic decrease in development projects over the last ten years. More and more projects are being cancelled or have their activities significantly decreased. As a example is Nicaragua which used to be one of the major contributors of both Danish and Swedish aid in different forms now are the activities close to zero.
I think that Governments and civil society should think twice before they ask the market to help them out. Governmental oversight might be a very good solution on paper but in reality it would still be under the influence of the market. Oxfarm might believe that institutional investors constitute an endless money stream that can be used for the common good. But in the end of the day pension funds will be responsible to the people who have put their hard earned pension money into their pot in the hope that there would be money for their retirement. If the intuitional investor can’t make that promise come true they will cease to exist no matter how many poor they have saved along the way.
Oxfarm wants governments to regulate investors’ ability to invest on short term basis. In the market for investments are institutional investors some of the most long term strategist around. They usually invest in companies that they believe will be around in ten or twenty years because they will not need the money anytime soon. People save for their pensions from around the time that they leave school but they do not need the money before they are well into their sixties. This gives a lot of time for the institutional investor to think long-term. However…
- This will favor companies that are already established on the market which are mainly big companies.
- It makes it hard for small companies to raise funds if they do not have an already established track record.
- It means that companies who have large institutional investors as their major owners will tend to be more conservative.
Institutional investors are among the wealthiest organizations in the world. They can virtually make and break companies with their recommendations and investment strategies. Companies who can attract intuitional investors are usually never out of cash as long as the company is well governed. But they leave small and middle size companies alone, who in turn, will lack capital if the “short-term” investor is not there to take a risk.
Oxfarm claim that companies taking a CR approach will be more profitable in the long run. I do not know what the long run means in this context, but there is no evidence that companies who have a CR focus are more profitable or make a sounder investment. As I have blogged about before there are actually more risk associated with a CR approach to investments. There are, however, other good and legitimate reasons for investing socially responsible but more money is, at the moment, not one of them.
I would love to see more transparency from institutional investors and for them to open their portfolios for scrutinizing. I’m sure that we will find that ethical screening can mean a great deal of different things. One of the greatest obstacles is that there is no consistent way for organization to report on their portfolios so there is no way for outsiders to really get a glimpse into the “boiler room” so to speak. One of the reasons is that institutional investors rarely micro manage their own funds. They leave it to portfolio managers who will do investments based on the guidelines issued by the institutional investor. Most of the time one manager will have between 1000 and 2000 companies under his/her care. The manager might be specialized so that they know and are experts in a specific region or screening process. One Institutional investor might have several portfolio managers from different companies working for them and basically trust them to micro manage their fund based on a specific risk profile, screening products and estimate on return. Creasing transparency in such a environment is next to impossible as there is competition between different portfolio companies and they invest a great deal of their own funds in producing in-depth analysis which will give them a competitive advantage.
The question is Oxfarm wrong in their analysis and recommendations? No, not really. It just comes down to that they are “a Rights based organisation” and they will of cause see the world based on how their own perceptions nothing more and nothing less. If NGO’s and CSO’s want to change the business world they will need to know how the market functions based on knowledge and not belief, it is as simple as that. You can find the full report following this link.