Understanding the governance structures that underpin responsible investment decision-making

Abstract

The aim of this essay is to consider the extent to which best practice governance can be adapted to support effective responsible investment (RI) decision-making. Governance refers to the mechanisms and processes by which decision-making is managed. Best practice governance emphasizes institutional coherence, expertise and effective processes of deliberation (Clark and Urwin 2008). The essay focuses on institutional investors with long-term investments horizons, such as pension funds, endowments and sovereign wealth funds. As universal owners, it is widely held that these investors must incorporate relevant environmental and social issues into their investment decision-making to achieve their investment objectives. This essay argues that adding environmental and social dimensions to the already complex process of investment decision-making requires increasing and on-going investment in an investor’s own governance. The form of governance required depends on the perspective motivating an investor’s RI strategy. The literature can be divided broadly into two perspectives. The first perspective suggests that investors should limit their consideration to environmental, social and governance (ESG) issues that are underpinned by a sound business case in the form of a financial risk or opportunity. A second perspective suggests that financial risks and opportunities at the portfolio level cannot always meaningfully be separated from broader political, ethical and sustainability issues. This second perspective requires that investors adopt a more reflexive form of governance to understand how their own decision-making frameworks interact with and contribute to shaping risks and opportunities at the systems level.