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Responsible investment:
a force for poverty alleviation.
Framing the debate.
By Rory Sullivan and Helena Viñes Fiestas
The current crisis The unprecedented turmoil in the It is in this context that Oxfam has
world’s financial markets has resulted launched a new project, ‘Better Returns
offers the in a significant loss of trust in the global in a Better World’. The project’s
opportunity to financial system. Financial institutions objectives are: to analyse the role that
re-think the and the market as a whole have been institutional investors can play in poverty
criticised for short-termism, for lacking alleviation; to encourage investors to
contribution that
transparency, and for not being properly take account of poverty issues in their
investors can make accountable to regulators or to wider investment decisions; and to identify the
to eradicating society. The credit crisis has also raised key barriers to long-term investment in
global poverty. wider questions about the proper role developing countries.4
of investors in society, both in terms of
the specific investments that they make This discussion paper is the first part of
and the manner in which they use their the project. It has three objectives. The
influence to ensure that the positive first is to make a prima facie case for
social and environmental impacts of why investors are of critical importance
their investment activities are maximised, to the development agenda. The second
and the negative impacts minimised. is to provide an analytical framework for
the project. The third is to identify some
Oxfam sees that the current crisis of the core questions that the project will
offers the opportunity to rethink the seek to explore.
contribution that investors can make
to eradicating global poverty. Oxfam
believes that investors have a critical role
to play in poverty alleviation, through
supporting economic growth, building
infrastructure, and helping to create a
vibrant, entrepreneurial private sector.
Oxfam also believes that investors can
play a wider role through encouraging
companies to attain higher standards of
corporate responsibility performance.
Under the right The power of institutional investors – While acknowledging existing difficulties,
including investment banks, insurance there are strong reasons for investors to
conditions, steady companies, retirement or pension funds, consider investing in developing countries
inflows of long-term hedge funds, and mutual funds – lies as such investments can provide potentially
private investment primarily in their role as managers of higher returns, particularly in countries
immense pools of capital. Of particular experiencing strong economic growth.5
can provide
importance to this discussion is the
substantial social potential contribution that this capital Furthermore, under the right conditions,
and development can make in overcoming the economic steady inflows of long-term private
barriers to development and poverty investment can provide substantial
benefits.
alleviation. Investors are also important social and development benefits
because of both their influence over through supporting economic growth,
the governance and conduct of the providing capital to build essential
companies they invest in, and their infrastructure, contributing to a vibrant,
wider influence on public policy. entrepreneurial private sector, and
paying taxes that governments need to
Capital allocation provide schools, hospitals, and other
The case for investing in developing essential infrastructure and services. In
countries is not unequivocal. Many addition, investments in areas such as
of these economies have been microfinance (whether directly or through
characterised by economic and political microfinance investment vehicles (MIVs))
instability, underdeveloped financial can directly contribute to improving
markets, lack of transparency, and weak access to finance, a critical issue for
investor protections. The consequence poverty reduction.6
has been that investors have often
sought greater protections or higher
returns than they would if investing in
equivalent activities or companies in
developed countries.
However, investments in developing Influencing company operations These arguments are increasingly
countries have not been unambiguously There are compelling business reasons recognised by investors. An increasing
positive from a development perspective. for companies to proactively manage number of institutional investors have
First, the distribution of these investments their social and environmental impacts. worked to encourage improvements in
has been concentrated in a handful of Issues such as environmental companies’ corporate governance and,
large, middle-income countries such as degradation, climate change, HIV and more recently, corporate responsibility
China, India, and Thailand, with low- AIDS, ethnic conflict, and inadequate performance. In recent years, investor
income countries receiving relatively health and education systems can impact influence has been key to the delivery
little investment.7 Second, investment negatively on business costs and present of important outcomes. These include
flows can be highly volatile and subject significant risks to corporate assets and dramatically reduced prices of AIDS
to sudden reversal. For example, the reputations. There are also wider medicines, the withdrawal of companies
outflow of funds from Indonesia during business benefits to be derived from from unhelpful industry lobby groups, the
the 1998–99 financial crisis contributed to operating in increasingly prosperous and adoption of environmental standards,
a significant decline in the country’s GDP stable societies, such as having access and improvements in labour conditions
which, in turn, resulted in a significant to a healthy and competent workforce, in retail supply chains.10 Investors have
increase in unemployment (e.g. in prosperous consumers, predictable used a range of strategies to effect these
Indonesia to 15 million people) and saw trading and financial systems, and a outcomes; some examples are presented
extreme poverty increase four-fold.8 This well-governed economy. In addition, in Box 1 on the following page.
pattern of capital outflows undermining companies may be able to access new
the hard-won development gains of business opportunities through, for
previous decades was a common feature example, developing new products,
across the East Asian and Pacific region services, and technologies, or even
during this time.9 transforming business models to address
social and environmental challenges. The
arguments for companies to take a
proactive approach are not confined to
the business case; there are also
important ethical dimensions, with many
large companies recognising that they
have obligations to behave in a
responsible manner.
Investors have
a role to play in Box 1: Exerting influence – some examples
constructively Research and engagement Since 2002, Insight Investment has actively
influencing public encouraged companies to improve their supply chain management
policy on social practices. Insight researched the impacts of buying and pricing practices
on supply chain labour standards. It also examined listed companies’
and environmental exposure to the worst forms of child labour. It benchmarked the
issues. performance of retailers and supermarkets on supply chain labour
standards and subsequently engaged with these companies to encourage
improvements in their management, auditing, and reporting processes.
These activities have led to a number of companies, in particular in the
retail sector, significantly improving their management of these issues.11
Attitudes have We believe that the most useful way to secondary schools has declined by 60
frame the discussion is to locate our work per cent; two million lives are saved every
changed, with within internationally recognised goals year by immunisation; and two million
business now and objectives for poverty alleviation. We people now receive AIDS treatment.19
recognised as a therefore use the Millennium
Development Goals (MDGs) as the basis There is, however, a long way to go: 1.4
key actor in the
for defining the key poverty-related issues billion people still live in extreme poverty;
delivery of the on which investor interest should be ten million children a year die before their
MDGs. focused. Similarly, we use the UN fifth birthday; and 1.1 billion people do not
Principles for Responsible Investment have access to safe drinking water.
(UNPRI) as the starting point for defining Furthermore, many of the gains that have
the role and responsibilities of investors. been made to date are fragile. The current
global financial crisis fuelled by the credit
Business and the Millennium crunch, economic slowdown in developed
Development Goals countries, and rising inflation, are likely to
In 2000, world leaders gathered at the hamper economic growth in the developing
United Nations and adopted the MDGs, world, threatening to hinder or even reverse
committing themselves to take co-ordinated progress towards the MDGs.20 The full
action to reduce extreme poverty. The impacts of the financial crisis on developing
MDGs are a set of eight targets to be countries are unknown, although estimates
achieved by 2015, ranging from halving suggest that flows of funds for emerging
income poverty to tackling the spread of markets could fall by as much as 25 per
HIV and AIDS and providing universal cent,21 exacerbating problems caused by
primary education.18 Together, the MDGs high fuel prices and the possibility of a
– agreed by all the world’s countries and reduction in international aid. Beyond the
leading development institutions – form financial crisis, there are other issues: food
the principal framework for global efforts prices are estimated to have risen by 83 per
to tackle poverty (see Box 2). cent in the past three years, driving an extra
100 million people below the poverty line, 22
In 2008, halfway to the target and changes in weather patterns are already
implementation date, there has been negatively affecting poor communities in
encouraging progress in some areas. For developing countries as a result of more
example: the number of people living on erratic rainfall and the increased incidence
less than $1 a day fell by 278 million of droughts and floods.23
between 1990 and 2004, and has fallen
by 150 million in the past five years alone; When the MDGs were first developed, the
about 40 million more children are in primary obligations to meet them were
school; gender disparity in primary and considered to rest with governments and
The integration The Principles are intended as a generic In addition we expect that the project will
framework for asset managers and also canvass some wider, cross-cutting
of poverty and
asset owners, rather than as a detailed issues such as:
development issues implementation framework on the
into investment priority issues identified in the MDGs. • How does the role of investors differ
The questions that, in our view, need to between asset classes (e.g. between
activity offers
be addressed in order for the Principles equities and bonds)?
the potential to to be made much more relevant to the
• Should
investors have different
significantly improve development agenda (and which will be
expectations of companies from
the lives of millions the subject of Oxfam’s ‘Better Returns in
developed and developing countries?
a Better World’ project) include:
of people living in • To
what extent do investment time
poverty, while also 1 Why should poverty-related issues horizons influence investors’ views on
enhancing long-term be integrated in asset allocation and poverty alleviation?
investment decision-making? Does
investment returns. their omission put financial value at risk or
• Whatare the barriers (e.g. motivations,
assumptions, incentives) to longer-term
does their inclusion help create financial investment in developing countries?
value?
• Whatregulatory changes or other
2 Can poverty-related issues be incentives might be used to produce
incorporated into investment better outcomes for pro-poor
analysis? Can company performance development?
on poverty-related issues be measured?
How can this data be incorporated
into investment analysis and decision-
making?