Tuesday 31/03/2020

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Responsible investor better equipped to understand risk

Responsible Investment Strategist

There are several major risks to which all sectors are exposed nowadays. Responsible investment, thanks to its critical approach and initiatives to foster best practices in full transparency, offers an answer to this issue.

These exert a significant influence on their way of operating. For the insurance sector, this involves a major paradigm shift. ”The dangers have a future” was the title of a talk given by Mr Vaguener of Willis Towers at a seminar on growing major risks hosted by Decavi.

As a matter of fact, risks do have a future, as the sector is confronted with several major elements which are unpredictable, including climate change, terrorism, food crisis, etc.) Against that backdrop, the experts of the seminar questioned whether the world can still be insured, and they all came to the same conclusion : prevention is a key to the solution and the public authorities have a very important role to play here. It is therefore not hard to make the link with responsible investment.

  • On the one hand, increased influence by the public authorities involves the citizens, as eventually the cost and issues related to insurance will have an impact on society. Hence, civil society has the right, even more than today, to demand that economic actors, both corporations and states, take up their responsibility. In that way, civil society’s demand that companies become more responsible and transparent with regards to their fiduciary duties, will not cease to become more vocal. The prime objective of responsible investment is to foster transparency and responsibility vis-à-vis the current and future challenges.

Indeed, the first role of a responsible investor is to take a critical view of things and to ask questions. This will enable corporations, as an economic actor, to become transparent and assume their responsibility in the light of their fiduciary duties. Also on this domain, responsible investors have a role to play. By analysing the programmes and policies adopted by companies in the face of environmental, social and governance challenges, responsible investors are able to assess to what extent companies can take preventive measures.

Responsible investors need to make themselves heard and acts as a responsible shareholder. Investing is far from insignificant. Indeed, by speaking up, investors may defend the rights and duties of minority shareholders, but may also require companies to provide answers to increasing major risks.

Responsible investors take up a long-term commitment. As already mentioned by Mr Vaguener, “time is no longer on our side”. Indeed, these challenges must be tackled urgently. Responsible Investment aims to reconcile future challenges, which are geared towards the mid to long term, with investments, which tend to become increasingly focused on the short term.

  • On the other hand, although public authorities also need to do their part against the backdrop of growing major risks, we should also look at the way States assume their responsibilities, and hence apply a responsible approach to one’s investments in government debt. In their capacity as a major economic actor, states have very important rights and duties. Debt may be a significant lever to change, and may even be much more powerful than listed equities. Also on this domain, investments have a role to play. The responsible approach is more focused on a country’s ability to pack back its debt, rather than its capacity to take on even more debt, although the latter concept is key to the composition of fixed income indices. Although some countries go bankrupt or further increase their debt levels, the debt we owe to the planet may not be oversubscribed or go into default. Every year, the NGO Global Footprint reminds us of this with its Earth Overshoot Day. As of 13 August 2015, we have consumed more natural resources than we have produced in one year.

Although we unfortunately cannot predict all risks, prevention and responsibility on behalf of the various economic actors may help to anticipate and predict many of them. Responsible investment, thanks to its critical approach and initiatives to foster best practices in full transparency, offers an answer to this issue.