Responsible Investing Part Two: implications for everyone in financial markets

The essence of responsible investing (RI) is not its focus on environmental, social and governance issues (ESG) – these get the headlines but are about implementation.  The essence of RI is simply to change investor and corporate horizons from the short-term to the long-term.  RI is about shifting the focus from maximising near term returns to generating long-term sustainable returns. 

A long-term focus means that the investment process considers risks expected to impact many years ahead, not simply many months ahead.  Seen through this lens “responsible investment” is the same as “conventional investment” – it is about generating value and cash creation (but includes a wider range of longer term factors). 

What does a trend to responsible investing mean for participants in financial markets?  Below we consider the perspective of companies seeking capital, investors, fund managers, financial advisers, regulators and the government.  There are implications for everyone.

Companies that seek public market capital

For many companies RI may initially mean shifting the focus of corporate reporting and communication.  Rather than simply reporting on profit for the last financial year, increase reporting on environmental, social and governance issues as well.  Rather than focusing on current operations and near term performance, clearly articulate the long term corporate strategy and goals.  A change in reporting and communication to include ESG factors will drive a change in the way a corporate operates, including a longer term view on its capital investment.