Why SRI could be propelled into the spotlightDecember 2008
Mike Scott talks to pioneering ethical investment advocate Peter Kinder about his belief that the current financial turbulence could teach mainstream investors the wisdom of long-term thinking
If Peter Kinder is sure of one thing, it’s that the crisis in global financial markets makes socially responsible investment more relevant than ever. But the president and founder of US-based KLD Research & Analytics believes the future has to be considered from a number of angles.
‘Firstly,’ he says, ‘we need to to work out what impact SRI can have on revisiting the regulatory framework around securities issuers. Secondly, what did SRI signal about the coming crisis? And finally, what, if anything, does SRI signal about the shape of the economy going forward?’
On the regulatory issue, Kinder – who co-founded KLD in 1988 to provide SRI research for institutional investors – notes that social investing ‘has always advocated greater transparency – and greater and more meaningful disclosure’. Now, he says, that view may be adopted by the mainstream, with precedents suggesting the financial sector will face more legislation – and soon.
Everything is up for grabs, he argues, and in five years time the investment landscape could be unrecognisable. ‘There is a strong anti-Wall Street mood and that will darken with the winter,’ he predicts.
Kinder believes the market focus will now shift decisively onto how companies are run as opposed to their aspirations – to looking at what kind of social and environmental impacts they have, and how they react to those problems.
As a result, he expects a return to fashion of the kind of value investing represented by the American investor-philanthropist Warren Buffett. ‘That type of analysis of issuers would include a lot of what social investors look at,’ he says.
SRI investors, Kinder believes, were better prepared than many in terms of awareness of the crisis, ‘because they have never fully signed up to the idea that you can diversify risk merely by maximal diversification’. He cites the example of Norway’s national pension fund, one of the world’s largest investors and a leader in SRI, which ‘looks very carefully at what companies actually do’.
A long-term sceptic of the value of sky-high executive compensation, Kinder also expects a swift re-focussing of the way senior executives are rewarded – and how they are expected to behave. ‘We have to face the ugly fact that senior executives have a job life expectancy of five to ten years, and so have been incentivised to take out as much as they can on the basis of the share price,’ he says.
This led to managers wringing the maximum shareholder value out of companies’ long-term investments in property, plant and equipment, often using leverage. No one complained about ‘obscene and absurd’ compensation when share prices were going up, he points out. Yet in previous generations, the focus was on the health of the overall entity. ‘Shareholders were just one of the stakeholders – and not the most important.’
Yet high executive pay, Kinder says, is a symptom of a far greater underlying ill. ‘We have to get back to the notion that [corporations] are cultures, not something just represented by the share price.
In that sense, he argues, ‘what we are looking at in this debacle is a broad justification of the investment approach that SRI has traditionally represented. As a result, we’re going to see much more of the kind of thing that [SRI investors] look at moving into mainstream investment.’
Already a member? click here to login