Sunday 2 November 2008

What does the financial crisis mean for responsible investment?

Responsible or sustainable investment is about getting returns over the longer term, about avoiding short-term benefits that sacrifice the medium and long-term.

Most commentators agree that the current crash is rooted in the focus on short-termism over long termism. Of rapidly expanding sub-prime portfolios with, it's now clear, not enough focus on the sustainability of returns; of incentive schemes that demanded sacrificing long term outcomes by maximising quarterly results; of pushing leverage to the max without allowing for inevitable market shocks.

We need incentives, governance and regulation aligned to recover the balance between sustainable investment and the necessary energy of liquid markets.

The crisis has shown that longer term horizons require looking at the ecosystem supporting investments and at ensuring economies will be robust enough to continue to give us returns. We know that improved governance gives, on average 1-2% better returns over the longer term ; we know from the Stern Report that tackling climate change will costs the economy 1-2% of growth versus not tackling it costing us 10% of growth.

The crash is more likely to push back the extreme short-termist virus that has infected society, and shift funds to responsible investment.