Ethical Performance
inside intelligence for responsible business


New technique is useful, but needs careful handling

April 2010

Rory Sullivan warns that ‘enhanced analysis’ is no panacea in the responsible investment field

I’ve recently become involved in Oxfam’s Better Returns in a Better World project, which is designed to explore the role that institutional investors can play in poverty alleviation and development. One of the central questions for the project is whether ‘enhanced analysis’ – where investors take explicit account of social and environmental issues in their investment analysis and decision-making processes – can make a positive contribution to the delivery of better social and environmental outcomes.

A growing number of asset managers – including Newton, F&C and Aviva – report that they are integrating these issues across their investment portfolios. The rationale is that socially responsible companies have better risk management systems and processes. This sends an important signal to all businesses that investors value – and are willing to reward – good corporate responsibility performance.

However, it’s important not to overstate the contribution of enhanced analysis to delivering sustainable development outcomes. First, short investment time horizons and investors’ focus on financial materiality (in other words, issues that have at least a five per cent impact on a key financial indicator over a 12-month period) mean that many significant social and environmental issues are not taken into account in investment decisions. The consequence is that companies often conclude that investors are simply not concerned about their social and environmental performance.

Second, enhanced analysis tends to focus on quantitative rather than qualitative aspects of performance and risk. When investors involved in the Oxfam project examined the question of access to water in developing countries, they were reasonably comfortable with calculating the costs of water use and how this might change over time. But they didn’t think they could, or should, build factors such as environmental justice and local communities’ needs into their assessments – other than to the extent that these could affect water costs.

Third, enhanced analysis may have perverse outcomes. For example, when we considered the implications of analysing the wages paid in supply chains, a number of non-governmental organizations cautioned that increasing rates could actually see companies weakening other contractual benefits. They also noted that calculating labour rates may increase the downward pressure on wages.

So our research has convinced us that enhanced analysis is an integral part, but only a part, of investors’ responsible investment activities. Unless such analysis is accompanied by dialogue between investors and companies, where investors spell out the importance they assign to high standards of CSR performance, the concern must be that enhanced analysis will fail to deliver on its potential as a tool for improving the environmental and social performance of firms.

Rory Sullivan, former director of investor responsibility with Insight Investment, is the investor lead on the Oxfam Better Returns in a Better World project (

Rory Sullivan | Global | Risk management


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