Pope Francis has crafted a compelling message in his encyclical on climate change and economic inequality. With Catholics representing 17% of the world's population — 21% in the United States — and Catholic values expressed through large institutional investment portfolios worldwide, even non-believers should take note.
The moral obligation the Vatican describes to protect the environment and the poor has a parallel concept in the institutional investment management industry: fiduciary duty. Asset owners and their investment managers 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 fiduciary beneficiaries and 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.
As institutional investors, we already have the rudimentary tools we need to take action, as we are able to analyze many companies' environmental 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 forward aggressively with initiatives, such as the Sustainability Accounting Standards Board, to build universal metrics to gauge and compare corporate social and environmental behavior and impact.
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 institutional 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 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.
Pope Francis' message should 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.
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 that must be preserved. In the economic context, elements of natural capital are seen as assets that support economic activity and must be preserved to ensure prosperity. The church and many institutional investors are calling for action to protect this natural wealth, calling for better stewardship of these assets.
Institutional investors need to steer companies to recognize their environmental impact and opportunity to help solve humankind's greatest challenges, the sustainability of our environment for all people, present and future. Leading institutional investors and companies must understand the pope's message and take responsibility for the social and environmental outcomes of our investment and business activity.
John Streur is president and CEO of Calvert Investments Inc., Bethesda, Md.
