Home > News > Newsmakers > Is Reputation More Important Than Morals in Responsible Investing?

NewsmakersSeptember 4, 2014

Is Reputation More Important Than Morals in Responsible Investing?

Academic research has found that “moral duty” is no longer an important consideration when adopting ESG principles.

Pressure from clients and positive PR are more important considerations than moral motives when investment companies sign up to the United Nations’ Principles for Responsible Investment (PRI), according to academic research.

In a paper titled “Sources of Stakeholder Salience in the Responsible Investment Movement: Why do investors sign the Principles for Responsible Investment?”, authors Arleta Majoch and Andreas Hoepner of the International Capital Market Association Centre, and Tessa Hebb from Carleton University, analysed five years’ worth of data from PRI signatories, and quizzed them on their reasons for signing.

The research found that pressure from clients (“utilitarian power”) and the perceived advantages of being signed up to the principles (“pragmatic legitimacy”) were the most important drivers for signatories.

In addition, the reputational benefits of adopting the PRI were noted as an important factor.

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Majoch, Hoepner, and Hebb wrote: “Investors recognise the reputational benefit of signing the PRI, as well as the legitimising effect it has on both their organisation in general and on their environmental, social, and governance capacity, resulting from the high degree of legitimacy of the PRI itself on the market.”

But the researchers noted that “moral motives” have become far less important than when the PRI were first introduced in 2005. For the first two years, signatories were primarily those who supported the values encapsulated in the principles, but the authors stated that the moral factor has been “completely superseded” since then by factors such as reputation and client pressure.

They added: “These findings offer an interesting insight into how both the investment industry and the PRI’s place in it have changed between 2007 and 2011. It draws attention to how important branding and image are at an organisational level in the financial industry, and how signing the PRI has been increasingly motivated by such benefits.

“It highlights that ESG investing is a continually developing space where investors are keen to join forces in action, sharing knowledge and exploring ESG themes and strategies. The high degree of salience coming from a variety of sources confirms the PRI’s role as central in this emerging logic.”

More than 1,000 companies and organisations have signed the PRI since its inception. The researchers estimated that the signatories represented more than $45 trillion worth of assets, more than a third of global assets under management.

In April this year Harvard became the first university endowment to sign the PRI. In contrast, a number of Danish pension funds removed their signatures in December 2013 amid concerns that the organisation behind them had governance issues of its own.

The research is available to download here.

Home > News > Regulation > LGIM: Central Banks Are Wrong on Inflation

Regulation September 4, 2014

LGIM: Central Banks Are Wrong on Inflation

A Legal & General Investment Management economist thinks the Fed and Bank of England are fundamentally wrong.

Janet Yellen and Mark Carney, the overseers of the US and UK central banks, have made a fundamental mistake in their inflation calculations, according to an economist at Legal & General Investment Management (LGIM).

“Global core inflation seems to have troughed, even in Europe,” said James Carrick. “Our model shows we are on the cusp of a period of rising inflation.”

“QE created job vacancies, but it didn’t create jobs,” said James Carrick, LGIM.Carrick said central banks had “unleashed an arsenal of weapons to fight the threat of deflation” and feared their economies were not yet strong enough to stand on their own two feet.

In fact, Carrick said, inflation was about to rise again, but central banks were using the wrong metric to gauge the crucial economic factor.

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“The threat of deflation has diminished,” he said, adding that employment data was key to both his and the central banks’ views—yet he believed he had the right angle.

“The Fed and Bank of England believe there is slack in labour markets, that there are excess workers waiting for jobs,” said Carrick. “Actually, we have spoken to employers who are actively recruiting but cannot find the staff who have the correct skills.”

The large quantitative easing programmes, put in place by the US and UK during the financial crisis, have created jobs, Carrick said. But there has been no micro-managing of the process, which has led to jobs being created that do not fit the skillset of the population or are in the wrong geographical area.

“QE created job vacancies, but it didn’t create jobs,” he said.

Carrick referred to historical data that showed when employers were in the same situation of having a high number of openings but not being able to recruit due to lack of suitable staff, inflation began to rise.

He said the unemployment was structural, rather than cyclical, and pointed to similar periods in the 1970s and 1980s, adding that after the credit crunch the situation was “not surprising”.

Inflation could be the by-product of these events for a chain of reasons, Carrick said, setting out an example using restaurant chain McDonalds.

“In equilibrium, McDonalds has enough staff to meet demand. If demand shoots up, McDonalds has to advertise vacancies,” he said. “The fact it has vacancies is a reflection that demand is greater than supply as demand for burgers exceeds the number of burger flippers. Management should be more confident of raising prices.”

He also added that staff may be more demanding of higher salaries in this case, which would in turn push up prices to the consumer.

Update: European Central Bank President Mario Draghi has this morning announced an unexpected cut in the main interest rate for the eurozone to 0.05%. The deposit rate has been cut to -0.2%.

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