This report provides oversight of responsible investment (RI) approaches that realign investment practice with purpose. These approaches unify the field, generate a coherent framework for designing quality RI offerings, and support meaningful comparisons of diverse RI offerings. RI is evaluated using this framework, which is helpful for those interested in investing in RI.

Shifting focus from what RI offerings are; to focus on what they do

RI approaches are diverse in their rationality, ranging from religious beliefs to risk management. Field guides describing these perspectives can help newcomers, but the framework described in this paper is essential for designing and differentiating high-quality RI offerings for increasingly more commercial and compliance-induced markets. The paper focuses on viewing RI as an intervention designed to correct gaps in conventional financial markets recognition of real-world value, including traded and untraded/intangible assets. Recommendations include shifting one’s focus from what RI offerings are and to what they do.

Intervention

Portfolio interventions, implemented by voluntarily limiting exposure to inconsistent opportunities that destroy “real value,” are straightforward RI interventions. Other interventions include RI selection, which applies criteria to yield a permissible universe, and impact investing, which asserts the purpose of investment directly by holding accountability for ‘real-world’ outcomes in addition to financial performance. ESG integration aims to bend investment practice towards achieving its purpose by extending investment analysis to indirect, intangible, and often overlooked issues such as real value and risk through real-value assimilation on financial infrastructure. Principled RI stewardship prioritises intervention in areas that permit value extraction to be profitable, aiming for the assertion of prioritising real-value outcomes.

Purpose as the organising principle

Assessing the quality of RI interventions against the principle of re-aligning flows of capital to real-world value creation is crucial. High-quality portfolio interventions, such as impact-driven portfolios, deliver faster investment practice alignment to its purpose and appeal to individual investors. Alternatively, purposeful ESG integration aligns markets by nudging them towards incorporating real value, attracting institutional investors. Purposeful stewardship interventions calibrated for reach, scope, and speed assert real-value priorities, prioritising intervention in areas that permit value creation instead of extraction.

Combining interventions strategically

Combining RI interventions strategically is recommended to reinforce each other as using them in isolation may be overwhelmed and undermined by conventional practice. Analysis for principled ESG integration must test the limits of what real values the market can acknowledge and assimilate – opportunities that engagement targets -, thereby illuminating obstacles to realising returns from real-value creation. As advocacy targets obstacles to market recognition of real value, when combined with real-value aligned financial returns, the stewardship result will likely be consequential and durable.

RI quality for real-world returns

Only principled and consequential RI interventions can support the real-value results that responsible investors seek. Effective RI interventions are like principled ESG integration and stewardship interventions, more challenging and often more costly than superficial approaches that suffice to serve a compliance or commercial purpose. The objective of all RI approaches is to realign investment practice to its purpose. Assessing RI interventions against this principle is necessary.