EXECUTIVE PERSPECTIVE: The Vatican Encyclical and Responsible Investing
Pope Francis has crafted a compelling message. With Catholics representing 17 percent of the world’s population – 21 percent in the United States – and Catholic values expressed through large institutional investment portfolios worldwide, even non-believers should take note.
Just as the Pope is pointing to the stewardship of the world’s natural resources as a fundamental obligation, investors have begun to focus their attention on “Natural Capital” (air, land, water, biodiversity) as the foundation of societal prosperity. In the religious context, the environment is part of our inherited wealth which must be preserved. In the economic context, elements of natural capital are seen as assets that support economic activity, which also must be preserved to ensure prosperity. The Church and many investors are calling for action to protect this natural wealth, calling for better stewardship of these assets.
All companies have an environmental impact and an opportunity to help solve humankind’s greatest challenges, the sustainability of our environment for all people, present and future. Energy intensive and industrial companies have the most obvious footprint and opportunity to make their operations and products efficient and safe, but leading finance and information technology companies understand that their business franchises are dependent not on today’s product set, but on solving the most important problems society faces through their products and overall conduct as organizations. Leading companies are acting to protect or extend their economic sphere by evolving their business in a manner that creates environmental sustainability and inclusive prosperity.
The Pope’s encyclical appropriately highlights the disproportionate effect of climate change and other environmental challenges on the world’s poor. More and more market participants point to this inequity as a moral and economic problem. The economic concerns relate to the untapped potential of billions of people globally who are unable to flourish and contribute. As investors think about the global economy, they see great potential in emerging markets. Yet many of the millions of people who are being affected by climate change, and many millions of Catholics, are the poor people in these very emerging market regions (Africa, Asia and Latin America). The economies of these regions will be slowed by continued environmental degradation and the related poverty. To combat this, the environmental solutions that the world’s richest countries propose should prioritize the needs of developing nations.
The moral obligation that the Vatican describes to protect the environment and the poor has a parallel concept in the investment industry known as fiduciary duty. Investors must act in good faith in the interest of their beneficiaries and they should act with care and diligence to produce beneficial outcomes for their clients. One could argue that by ignoring the effects of unchecked climate change and its societal outcomes, an investor is not living up to his/her fiduciary duty.
Some thirteen hundred large investors (Calvert among them) with a total $59 trillion in assets have already signed the United Nations Principles for Responsible Investment (UNPRI), which set out a broad and voluntary framework to work towards goals that are consistent with the Vatican’s newly issued demands. The Vatican is much more direct and specific, and is essentially saying to those who have signed the UNPRI, “live up to what you signed, now!” Only a small handful of signatories have acted with the diligence and urgency required. All must get moving.
As investors we already have the rudimentary tools we need to take action, as we are able to analyze many companies’ environmental impacts and societal impacts. The Vatican points out that the measuring system we have as a society for wealth is inadequate and too narrowly focused on financial metrics. Responsible investors agree and must push aggressively forward with initiatives such as the Sustainability Accounting Standards Board to build universal metrics to gauge and compare corporate social and environmental behavior and impact.
Leading companies and investors understand the Pope’s message and the reality that society is asking us to take responsibility for the social and environmental outcomes of our business and investment activity. In our ultra-competitive global economy, leadership is used to gain advantage over laggards. The Vatican Encyclical is a reflection of changing societal norms, a call out to 1.2 billion Catholics and the rest of the world to act with urgency and compassion to solve our environmental problem and to create a greater level of inclusive prosperity. The leading edge of our global economic system has already moved, and Pope Francis’s message will undoubtedly push our competitive free-market forces in the right direction with greater speed. This process should create winners and losers among companies and investors, but not on the backs of the world’s poor.