INTEGRATING IMPACT INVESTMENT AND

ETHICAL CORPORATE GOVERNANCE

Introduction

• Demand for funds which cherry pick investments with strong environmental, social or governance (ESG) credentials have surged in recent years.
• Many of these funds include terms such as 'ethical' or 'impact' in their names.
• In this article we will understand how important is “ethical” and “impact” investment for a socially responsible corporate governance. 

 

Corporate Governance

• Corporate governance is the combination of rules, processes or laws by which businesses are operated, regulated or controlled.

Ethical Corporate Governance

• It refers to the processes and policies that a company has in place to balance the persuasion of market opportunities while maintaining accountability and ethical integrity. Corporate governance
• Mandatory "Corporate Social Responsibility" that encourages companies to spend 2% of their average net profit in the previous three years on societal goals is a part of ethical corporate governance. 

 

Ethical Investment and its types

• Ethical investing is the practice of selecting investments based on ethical or moral principles.
• It takes into account social, moral, religious, political, or environmental values prior to making the investment decisions.

 

Socially Responsible Investing Funds (SRI Funds)

• SRI funds avoid investments into sin stocks such as gambling, alcohol, smoking, pornography, tobacco or firearms, Terrorism affiliations.

 

Impact investment: Going a step further

• Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.
• Impact investors actively seek to place capital in businesses such as renewable energy, housing, healthcare, and education, micro-finance, and sustainable agriculture.

ESG 

• ESG (Environmental, Social, and Corporate Governance) investors tend to be more activist investors, participating at shareholder meetings and actively working to influence company policies and practices.

• Thus, ESG and Impact investors are far more proactive in their intention for positive impact as opposed to merely avoiding the negative impacts on the planet.

 

Criticism of Ethical Investment

• Socially responsible investment makes both businesses and the financial markets operate less efficiently. 
• One of the harshest critics of ESG was the late Milton Friedman, the leading light of neoclassical economic theory. 
• Friedman argued that evaluating a stock/project should focus on the company’s financial value and bottom-line profits.
• Socially responsible corporate expenditures are “non-essential expenses” that erode corporate and shareholder profits.
• Another criticism: The fees for ethical investing can be higher due to the research involved in identifying the right investment.

 

Let’s find out whether the criticisms are pragmatic in the 21st century..

 

The need of inculcating “Impact Investment” in Ethical Corporate Governance

• We as human beings including our businesses depend on biodiversity to keep us alive and healthy. 
• The air we breathe, the water we drink, the foods we eat and the medications we take are all by-products of a healthy planet.
• But our world, and the diversity of life it supports, is under threat. 
• Deforestation, pollution, diseases, greenhouse gas emissions, destruction of wetlands, climate change and globalization are wiping out species and damaging ecosystems at unprecedented rates. 

 

Business Impact  “The New Climate Economy” Report by Global Commission on the Economy and Climate 95% of plastic packaging — the equivalent of $120 billion annually — is wasted after the first use. microplastics have been found in almost every aquatic species. Over 140 million people will be displaced from their homes by 2050 if business continues as usual. Industries must drop carbon emissions by 40% by 2060 to stop the planet from warming over two degrees Celsius.  In combination with action from governments and other stakeholders, businesses that take action on climate change by adopting green policies, technologies, and strategies for growth could realize a total of $26 trillion in economic benefits. IPCC: The global temperature has already increased by 1C above pre-industrial levels. Global warming is likely to reach 1.5°C between 2030 and 2052, if warming continues at the current rate. This will jeopardize billions of lives. CO2 levels will reach 550ppm by 2050. Harvard Research: A high or “business as usual” scenario, CO2 levels will reach 550ppm by 2050. Ecological Threat Register, Institute for Economics and Peace (IEP) -1.2 billion people around the world would be displaced by 2050.  Extinction Rebellion Movement: With Business-as-usual only about 10 percent of the planet’s population would survive at 4 degree C. 6 billions lives will be wiped out by 2100.

• Larger picture: Business needs to be part of the solution, not just the problem. 
• The sustainability of businesses in the long run is based on the impact of its investment on the whole society. 
• After all, it is not possible to have a strong, functioning business in a world of increasing inequality, poverty and climate change.
• We cannot be bystanders. We need to be a giver, not a taker, in a society that gives us life in the first place.

As the UN Global Compact Report stated, - the single minded goal of profit in business at any cost is fracturing societies and destroying the environment. Thus, business is threatening the very elements that underpinned its own existence.

 

Way Ahead

• Corporate Governance can integrate this decision framework as a basis to support investments:

• Making Thematic investment mandatory in Corporate Governance: Portfolios which contain only those investments that adhere positively to a particular sustainability theme such as:  environmental technology, carbon intensity, community investing, affordable housing, human rights etc
• Engagement: collaboration with like minded investors on common issues.
• Government Policy: incentivizing and promoting ethical investment between different industries and tightening of standards across the corporate board.
• Shareholder activism: Investors who are active owners need to raise resolutions in order to achieve socially & environmentally sustainable projects.
• The shift of approach  in business strategy can play a key role in turning the Earth into a “Planet Healthy” as Gandhiji has rightly said; 

“The world has enough for everyone's needs, but not enough for everyone's greed.”