Book review: Your Essential Guide to Sustainable Investing

THE establishment of the United Nations-backed Principles for Responsible Investment (PRI) in 2006 marked a turning point for investors. The PRI united signatories under a framework that was consistent with the neoclassical underpinnings of traditional finance — the pursuit of the best risk-adjusted returns — while making explicit how environmental, social, and governance (ESG) issues should be included in the analysis and valuation of securities and in subsequent engagement with management and the voting of proxies.

While the practices of responsible investment (RI), socially responsible investment (SRI), and morals-based screening had been long intertwined without clear definition, by implicitly limiting the consideration of ESG issues to those that are financially material to shareholders, the PRI set a boundary that in turn helped define the other sustainable finance practices.

For most investors (universal owners such as pension funds may be slightly different) the overlap between RI and SRI ends when shareholder and stakeholder interests are no longer aligned. The primary benefits of the PRI’s framework have been as a catalyst for the incorporation of material ESG issues into investment practices, and as a signpost for the limits to which investors would naturally consider ESG issues. Beyond these limits, stakeholders need to seek other avenues for change such as regulatory or legal reform, or changes to consumer behaviour.