Staying the course: Responsible Investment in uncertain times

In a previous sustainability focused article, we discussed how the responsible investment world was poised to navigate a new US administration. We also noted early signs of divergence between how the US and European investment communities were approaching the next four years. Before providing an update on the rapid developments of the past few months, we outline what we mean by responsible investment, sharing our latest insights, before reaffirming our stance on the matter.

To be clear, responsible investment is not philanthropy. Investors, whether they want to emphasise the management of sustainability risks and opportunities in their investment process or not, have financial aspirations. In the case of responsible investment, investors add an additional layer of scrutiny by assessing sustainability factors i.e. environmental and social impacts of companies’ products, services and operations. The investment approach can involve a mix of excluding companies, where products or practises are deemed harmful, and positive inclusion factors while also focusing on engagement and advocacy for better sustainability outcomes. We are currently seeing key changes in the US around the engagement and advocacy piece, particularly when it comes to collaborative engagement. Collaborative engagement is when a group of institutional investors come together to engage in dialogue with companies, governments or supranational bodies on environmental, social and governance (ESG) issues. Advocacy focuses on promoting responsible investment practises both within the industry and publicly.

We are seeing many large US asset managers bow under the pressure of state and federal lawmakers to row back on the ‘woke’ agenda. This has involved pulling out of collaborative engagement groups like Climate Action 100+, set up to engage with the largest pollutant companies in the world to put policies in place to decarbonise. It has also involved companies and investment managers rowing back on publicly disclosed diversity, equity and inclusion policies.

In some instances, these policies and collaboration groups were far from perfect, very little is in this world. However, they were a start, and to throw in the towel when there is still work to be done on both climate transition and equality appears defeatist. Also, it is generally better to reform institutions while inside, rather than from the outside. There are parallels here to the responsible investment world, which started as an exclusionary focused approach, and has evolved to an inclusion and focus on change approach.

Although, it does feel at times that if things continue at this pace, there will literally and figuratively be an ocean between how US-based and European asset managers, in aggregate, are approaching advocacy. However, progress is not linear, this is a bump in the road and the trend over the long run has been positive.

In 2024, we enhanced our Responsible Investment Policy to include collaborative engagements with the aim of promoting sustainable practices within the investment community. This included us being an endorser of Advance. As an endorser, Davy does not participate in direct company engagement within the initiative, rather advocates for the initiative through its engagement with investment managers.

We continuously meet with the investment managers who manage assets on behalf of our clients to understand how their approach to managing sustainability risks and opportunities might change. While new information is always available to improve outcomes, we are glad to report that there are no notable changes within investment processes and how client assets are managed. It is also interesting that while we’re seeing a row back on some key initiatives from large corporations, there haven’t been notable changes in how companies are investing in and running their organisations. Four years in the life of a company that has been around for decades is short term.

While it is disappointing to see collaborative engagement deemphasised, especially with last year being the hottest year on record and the social and environmental impacts that had. Investment managers with a responsible investment focus are doubling down on their efforts to advocate for the importance of sustainability risks.

If there is one thing you can count on in such a polarised world, there seems to constantly be a cohort for and against most topics, with what feels like little consensus even on the things that could unite us. No doubt it will be an interesting few years for sustainability and responsible investment, but we are staying the course.