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    The responsibility of capital

    Patrick Odier, Senior Managing Partner

    The days when we could clearly separate investment and social responsibility are well and truly gone. The world has fundamentally changed over the last decade and we, as investors, have to adapt and contribute to a new, more socially and environmentally friendly global agenda. I say ‘have to’ because a global policy shift on this scale, and with this degree of momentum, throws up risks and opportunities that will have profound portfolio implications over the long term.

    But as this shift has taken root, investors no longer need to choose between doing well and doing good. It is becoming easier to meet both goals at the same time. And this has never been more important. As public finances come under increasing pressure, there is an ever-growing need and desire to find ways to enable the private sector to engage in the fight against some of the world’s most pressing challenges. After all, capital is an incredibly powerful tool for change. It determines which socio-economic models will prevail in the long-term. It creates jobs, drives economic growth and inspires innovation.

    With that power comes great responsibility

    Over the last decade we have seen a marked change in public sentiment. Whether that is a result of the financial crisis, or the greater accountability born of an information age, governments globally are being driven towards a more environmentally and socially progressive agenda.

    2015 marked an important turning point in this journey. That year, 193 countries agreed to adopt the UN’s 17 Sustainable Development Goals aimed at ending poverty, fighting inequality and tackling climate change. It also saw the introduction of the Paris Accord, which established a wide-reaching set of global goals to address climate change over the coming decades.

    2015 also served as a transition point in how capital markets reflect this policy trend. Our analyses show a relationship appears to have formed over the last two years between environmental, social and governance criteria, and stock valuation. This is a short timeframe over which to call a trend, and clearly our next objective must be to better understand the nature of the link between ESG criteria and their applicability to mitigate risk in a portfolio, and their role as potential return drivers.

    This is particularly important because the policy and regulatory direction is unlikely to be unwound any time soon, especially as the socially-conscious ‘next generation’ gain an increasing share of the world’s wealth and influence.

    Clearly, we have entered a new paradigm

    This has profound implications for the corporate sector. Companies must adapt their business practices if they are to remain sustainable in the new paradigm.

    This is good news for investors because it means firstly, that it is increasingly possible to do good without compromising return potential, and secondly, that ESG criteria may be a useful tool for mitigating portfolio risk over the long term. In turn, that would enable investors to more easily live up to their financial and social responsibilities.

    Importantly, this new paradigm is also good news for society. If companies with better environmental, social and governance practices find it easier to attract capital, then that will have an indirect positive impact on the wider socio-economic backdrop.

    However, as public budgets come under increasing pressure, there is another bridge for investors to cross.

    Consider, for example, the battle to eradicate some of the deadliest epidemics facing human kind today: HIV, tuberculosis (TB) and malaria. According to the Global Fund, which was created in 2002 as a partnership between governments, civil society, the private sector and people affected by these diseases, a funding gap of USD 20 billion has been identified for 2017 to 2019 for approved strategies to fight these three epidemics in countries where the Global Fund invests.

    The public sector alone cannot fill that void. As private investors we can play a role too.

    It is clear what is needed is innovation: new ways to help more people channel money towards social imperatives, but that also enable them to achieve their financial goals.

    In this spirit of innovation, we have forged a strategic partnership with the Global Fund, which invests roughly USD 4 billion a year to support programs run by local experts in more than 100 countries. We share a belief that private sector investment is a vital resource that needs to be better employed to support the sustainable development agenda.

    Why is this an important thing for investors to do? Aside from their increasing desire to create a positive social impact with their capital, investors will also be helping to address three diseases that are highly socially exclusionary. Research from the International Monetary Fund shows persistent lack of inclusion can undermine the sustainability of economic growth1, which is of course vital to investors’ success financially over the long term.

    And thus, our financial and social responsibilities become inseparable.

    1 IMF Blog, September 20, 2017: Growth That Reaches Everyone: Facts, Factors: Tools

    Wichtige Hinweise.

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