Business and finance operators depend for their success on the health of the economies in which they operate. Yet it is these economies that are threatened by declining environmental and social sustainability.
The resulting risks are particularly clear in the case of institutional investors. The growing reliance among most investors over the last 3-4 decades on modern portfolio theory has driven them to diversify their portfolios so minimising the impact of company-specific (idiosyncratic) performance. The more diversified a portfolio, the less significant the performance of individual companies becomes to portfolio performance.
However, particularly with growing portfolio diversification, the bulk of portfolio return depends on the performance of the economic systems in which the investable universe of investees operates. Sustainability factors threaten the viability of exactly these systems and hence future investment return. Tackling these risks should therefore be of interest to investors, but also to the companies in their portfolios.
Where do the risks come from? In large measure, the activities of investee companies and their customers. So, companies’ activities can threaten investors’ financial goals. Conversely, if companies improve their sustainability impact, it may help investors maximise portfolio value, among other things, because doing so can support the long-term health of other companies in investors’ portfolios and their own: both investors and their investee companies depend upon the health of the same economic systems. In other words, corporate activity that aligns with positive sustainability outcomes is potentially relevant to what it means for a company to be successful in the interests of its shareholders. Investors need it, but so also to the other companies in their portfolios.
There was a remarkable consensus among the legal teams in each of the 11 jurisdictions covered by A Legal Framework for Impact that, broadly, investors, including companies such as insurance companies, are legally permitted and may sometimes be required to try to influence others in the interests of bringing about positive sustainability outcomes where relevant to achieving investors’ legal goals – i.e. to get investees and others to improve their sustainability impact.