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1/18/2011

Barriers Continue to Challenge Investment for Poverty Alleviation

Based on two years of research, a report by Oxfam International encourages engagement by investors to improve corporate reporting, and recommends that governments require companies to report on social issues.

SocialFunds.com -- For two years, Oxfam International has engaged with institutional investors through its Better Returns in a Better World Project , a research project intended "to assess the potential for investors to contribute to poverty alleviation through their investment activities."

Specifically, the project sought to determine the influence of institutional investors through their allocation of capital, their engagement with transnational companies with operations in developing markets, and their influence on public policy.

In a recently published report entitled Better Returns in a Better World , Oxfam summarized the results of a series of nine workshops held with institutional investors. The workshops addressed such questions as whether the integration of poverty alleviation into investment decision-making can help create financial value, and whether corporate performance on poverty alleviation can be effectively measured and incorporated into investment analysis.

In addition, the workshops addressed the issues of reporting on poverty alleviation by corporations as well as institutional investors themselves, and the appropriate investment time horizons for poverty-related issues.

In its report, Oxfam stated, "The capital allocated to emerging markets will increase significantly," although at present most investors direct emerging markets capital to the larger nations, such as China, South Korea, Russia, Chile, and Brazil. Because of governance concerns and other uncertainties, investors take "quite a risk-averse approach to investing in emerging markets and, even more so, in low-income countries," the report found.

According to the report, "Poverty reduction and development are not, at present, seen as integral parts of the responsible investment debate." The barriers to consideration of poverty alleviation in investment decision making are several, the report continued. The barriers include lack of demand and oversight by asset owners, in part due to skepticism over the short-term benefits of sustainable investment in emerging markets.

The short-term focus of most investment mandates, which generally extend no further than three years and include one-year performance targets and quarterly reviews, encourage companies to focus on quarterly earnings reports at the expense of long-term financial value, the report observed.

The lack of transparency among "the vast majority of asset owners and asset managers" is another barrier to investment in poverty alleviation, because, as a result, "It is simply not possible to assess whether an investor's responsible investment commitments have had any impact on investment performance or social or environmental outcomes."

Furthermore, the report observed, the investment implications of social issues such as human rights, poverty, and sustainable development have not received anything like the level of attention accorded such environmental issues as climate change. "The absence of research reinforces investment managers' prejudices about the lack of financial relevance of these issues," Oxfam concluded.

The considerable barriers to investment directed to social issues are alleviated somewhat when the success of the United Nations' Principles for Responsible Investment (PRI) is considered. As of October 2010, 827 investors with more than $25 trillion in assets under management had become signatories to the PRI. As many signatories identify themselves as mainstream investors, "The argument that investors have social and environmental responsibilities is increasingly accepted in the investment industry," according to the report.

In addition, the sixth principle of the PRI requests that signatories "report on their activities and progress towards implementing the Principles," and requires that signatories participate in the PRI's annual Reporting & Assessment survey. And in 2009, the PRI announced an initiative "to develop appropriate indicators for public reporting of responsible investment activities" by signatories, Executive Director James Gifford stated. The transparency framework is expected to be incorporated in 2011, and should alleviate concerns about the current lack of transparency by asset owners and asset managers.

The report concludes with recommendations for both institutional investors and governments. It advises investors to collaborate in initiatives designed to develop tools for effectively evaluating risks to companies from social issues. As an example of a successful collaboration, the report points to Transparency International's work on bribery and corruption. The organization has stated, "Investors bear an important responsibility%133to clamp down on bribery within their company's operations all over the world."

Investors can also contribute to improvements in the development of tools to assess the investment risks and opportunities associated with poverty alleviation and sustainable development by directing investment managers to focus much more on the issues than they have in the past. The report also encourages investors to proactively engage with nongovernmental organizations (NGOs) that are developing tools for investment analysis and producing research.

Finally, investors should "move beyond simply encouraging companies to report, and focus much more on the completeness and quality of the data, with a particular focus on encouraging companies to report in a form that enables meaningful comparisons to be made."

For governments, the report recommends that they require companies to produce corporate social responsibility (CSR) reports, "building on the frameworks developed by the Global Reporting Initiative (GRI) and similar disclosure initiatives."

Governments should also require companies to report to shareowners on relevant environmental and social information, the report stated.

In his foreword to the report, Jeremy Hobbs, the Executive Director of Oxfam International, wrote, "Investors are increasingly aware that their success is critically dependent on their ability to demonstrate that they can contribute to reducing, rather than exacerbating, the major challenges facing these countries, including poverty and increasing competition for scarce natural resources."

Despite the persistence of formidable barriers to widespread uptake of sustainable investment practices, sustainable investment has grown to be accepted by many mainstream investors. As the evolution of such tools as integrated reporting continues, and governments take greater responsibility for fostering sustainable investment, the involvement of the private sector in the alleviation of social ills can be institutionalized.