Reframing the governance challenge for sustainable investment

In an era of borderless financial markets the financial sector can serve as an important mechanism for addressing long-term environmental, economic and social degradation. In particular, institutional investors tasked with long-term asset--liability management are integrating environmental, social and governance considerations into their decision-making and ownership practices to navigate future investment opportunities and threats. Despite the increase in sustainable investment initiatives, the transition to a more sustainable economy remains an aspiration. We argue this is because sustainable investment has been conceived and executed largely through existing governance frameworks, which are incongruent with the ‘sustainability’ problems facing institutional investors. To illustrate this point, we draw a distinction between traditional and sustainability problems, arguing that the latter are characterized by residuals (as opposed to externalities), such as conflict and behavioural biases, and that these residuals are irreducible. This distinction provides critical insight into why institutional investors must invest in their own governance to meet the challenges and opportunities that sustainability problems raise. While far from a comprehensive research agenda, the article draws on shared insights from the graduate student papers in this special issue to explore questions of innovation in governance required to confront sustainability issues.