Weekend Reading: To Be Virtuous and Prosperous

This blog is movingNot to worry: same blogger; same content; same price (free).

Benjamin J. Richardson just published a new working paper entitled “Sovereign Wealth Funds and the Quest for Sustainability: Insights from Norway and New Zealand.” I thought it was quite an interesting read, as Richardson offers a detailed assessment of the evolution (and future path) of ethical investing within sovereign funds. Here’s a brief blurb to give you some flavor:

“This article investigates two contrasting cases, the Norwegian Government Pension Fund – Global (NGPF-G) and the New Zealand Superannuation Fund (NZSF), in order to evaluate how they address any tensions between being both virtuous and prosperous. These SWFs have legislative mandates to invest ethically, and have been hailed by some researchers as having among the most progressive approaches in this area. But neither fund yet manages its entire portfolio comprehensively to promote sustainable development, and disseminate socially responsible investment (SRI) norms and practices.

“While there are some salient differences in how each SWFs is governed, each has, especially in their early years, focused on avoiding complicity in unethical conduct or social and environmental harm. This stance represented a rather narrow approach to ethical investment, which limited the capacity of these SWFs to promote environmentally sustainable development. More recently, both funds have begun to accept the business case for SRI, and reconceptualised ethical investment as a means of promoting long-term financial returns.”

This last sentence picks up on the part that I’m really interested in: how being a long-term investor changes the nature and scope of risk assessment and management. Think of it this way: the number of risks incurred by an intergenerational investor are perhaps far greater than the number of risks faced by an investor that’s only looking to hold a stock for one or two years. Say, huh? Here’s what I’m getting at:

“Socially responsible investment does not necessarily entail any irresolvable trade-offs between public and private interests, or financial and ethical goals. While commercial considerations do not always coincide with ethical ones, over the very long-term they should given ecological constraints to infinite economic growth. In the near term, countervailing business motivations to fund unethical behaviour certainly can prevail because of underlying market and regulatory failures, or because investors perceive no financial value in ecological assets such as biodiversity that cannot be monetised. In the long term, meaning at least several decades, the economic case for environmentally sustainable development solidifies.”

In short, as you move out into the ‘long term’, the ‘virtuous’ may in fact become synonymous with the ‘prosperous’. Why? Because the ‘extra-financial risks’ will eventually become plain old ‘financial risks’ because the ethical, environmental, and governance factors will inevitably be priced in at some point down the road. And here’s the really interesting bit: If a sovereign fund tilts its portfolio to be ready for these market dislocations (by internalizing these ‘extra-financial’ risks today), the long-term fund will profit from these factors while the short-term fund won’t.

That’s the theory at least. And it sounds pretty spiffy. But whether the long-term funds actually get their act together and ’tilt’ their portfolios in this manner is another question altogether.

Anyway, enjoy your weekend!

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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