Sustainable Finance: A review of the impact of Responsible Investment (RI) practices on the environment

Research Summary

This Defra commissioned study conducted by RiskMetrics looks at the impact of responsible investment (RI) practices on the environment and how the environmental performance of environmentally focussed investment strategies is assessed. The study involved a literature review of existing evidence on the impact of RI practices on the environment and approaches to measuring environmental performance in investment strategies. In order to assess actual practices in fund management, RiskMetrics then conducted a targeted online survey of 20 RI funds with an environmental component in order to identify the extent to which environmental investment strategies seek to improve the environmental performance of investee companies and if so, how these improvements are measured. The study then highlighted examples of best practice from fiveFund Managers and Institutional Investors in measuring environmental performance and improving environmental outcomes. The studyalso looked at the impact of global initiatives set up by investors, industry, intergovernmental organisations and civil societyin driving environmental improvement and concluded with a company-level analysis of environmental performance of FTSE 300 Eurotop companies over time.

Key Findings

  • There is limited research into the link between responsible investment and the environmental performance of companies.
  • Thereisa positive correlation between responsible investment and improved environmental performance although the studies reviewed provided rather weak evidence and the approaches to measuring environmental performance differed greatly. Very few studies could provide empirical evidence to support their conclusions and instead relied on qualitative indicators.
  • The online survey indicated that RI and environment-themed funds are not measuring the environmental performance of their investment strategies.
  • 40% of respondents to the survey measured the environmental impact of their funds in some manner, although this was mainly in a qualitative manner looking at process outcomes; 25% of respondents had measurable targets to meet their environmental objectives; and 15% of respondents reported on their progress on meeting environmental objectives in the survey.
  • Reporting on environmental performance of funds is typically qualitative in nature. It is therefore very difficult to establish an accurate and verifiable measure of a company’s progress over time.
  • Based on a company-level analysis of environmental performance over time, more FTSE 300 Eurotop companies had better environmental performance in 2008 (63.6%) than in 2003 (50.2%)

Researchers’ Recommendations

Recommendations were not requested from the researchers; rather the study was commissioned in order to review existing research and current practice within the area.

Methodology & Scope

The study methodology involved:

  • A global literature searchthat reviewed academic papers, industry reports and civil society reports on the link between RI techniques and environmental performance of investment strategies and approaches to measuring environmental performance.
  • An online survey that was carried out between June and July 2008 targeted primarily atUK funds but also included some US and European funds. The sample consisted of 55 funds and a total of 20 funds participated in the survey (36.4%).
  • Desk based research carried out to evaluate key RI initiatives set up by investors, industry, intergovernmental organisations, and civil society.
  • A company-level analysis of companies in the FTSE Eurotop 300 companies to assess their environmental performance over time using RiskMetric’s EcoValue 21 company ratings based on information from company literature, environmental groups and other NGOs, trade groups and other industry associations, government data bases, periodical searches, and financial analysts’ reports

Robustness

While the literature review involved a comprehensive literature search covering a 15 year period (1993-2008) on a global basis, RiskMetrics found only a limited number of studies (23) that discuss the environmental performance of investment strategies and only 11 of these studies have an exclusive environmental focus.Drawing conclusions from a small group of studies is difficult, especially considering the relatively weak evidence presented by these studies.Since the initial literature review yielded limited evidence, the online survey of 20 RI funds was conducted to gather additional data and information. Due to these small sample numbers, the results of this study should be treated with caution.

Limitations

It is important to note that this research was based on a limited number of previous studies which presented relatively weak evidence and a relatively small number of responses from RI funds.

It is also noted that investors are only one group of stakeholders amongst others who influence company behaviour. As a result, it is difficult to ascertain what impact is attributable to investor action. In addition, it is challenging to demonstrate a causal link between RI investment strategies and improved environmental performance by companies.

Further Information