Put People First - the role of sustainable finance

Over the weekend, I read the policy platform produced by Put People First – the civil society coalition formed in advance of the London Summit.

I was really struck by its strong focus on sustainable investment and finance.

In seeking greater ‘democratic governance of the economy’, the platform calls for financial regulation that promotes long term sustainable investment over ‘damaging’ investment and for investors to sign up to the UNPRI. It recommends to the UK government that environmental, social and governance impacts be included in stock market listing and corporate reporting requirements.

In making the case for a ‘green new deal’, Put People First identifies green financing as an area for job creation and recognises the need to incentivise ‘private savings and pensions…to be at the heart of funding a green new deal’.

The prominence given to sustainable finance is significant, whether or not you agree with the analysis and recommendations.

It reflects an increasing focus on capital markets amongst NGO and trade union campaigners (something that I suspect is here to stay). It also, perhaps, shows that civil society groups are developing a better understanding of capital markets, the role of investors and of the enabling possibilities of sustainable finance.

To my mind this is to be welcomed. If the interaction between civil society and the City is constructive, albeit critical, and built on common understanding, the possibility grows that tomorrow’s financial services regime will enable the transition to a low carbon economy and address the looming climate and resources crunch.

Robustness and Revival

Key points in the article “Revival requires a broad spread of demand” in last Monday’s Financial Times might have come from a member of the Network for Sustainable Financial Markets, the Marathon Club or indeed UKSIF. Instead, the piece was by Kemal Derviş, until recently head of UNDP and a former Turkish government minister.

The points were:

“A central problem in many markets has been short-termism and herd behaviour.”

“Part of the fundamental rebalancing will have to involve a regulatory framework and corporate governance that ties rewards to longer-term performance.”

“The crisis should teach us … not to underestimate the potential damage from events deemed unlikely or hard to predict. The costs of the financial crisis may pale in comparison to some of the long-term risks attached to irreversible global climate change, pandemic diseases and nuclear weapons proliferation.”

“A crisis can also be an opportunity for fundamental improvement. If this one teaches us that robustness is as important as efficiency in human affairs, it will have been such an opportunity.”

Yes, Yes, Yes and Yes!

The Innovator’s Prescription for financial regulators?

The Turner Review criticises “financial innovation of little social value” as a key cause of the financial crisis.

Two newly published books may offer useful insights for financial regulators seeking to support innovation that delivers instead high social and environmental value.

The first is “The Future of Finance: Megatrends beyond the Crisis,” co-authored by futurologist Adjiedj Bakas.

It predicts that the future will be different from the past in ways that go well beyond the current debate.

One of its key megatrends brings together a revival of ethics, an emphasis on health and happiness and new missions for financial services in which “all money is green”. But it goes beyond this.

It thinks that “financial services are going to develop into a creative industry” and mission-critical skills will be those seen today at companies like Google and Apple. And the boundaries of financial services will expand. Banks, insurance companies and pension funds will need to prevent problems from arising and provide solutions rather than only paying out.

Looking at how these trends may interweave provokes intriguing questions. “Who will deliver the most planet-friendly pensions tomorrow – an incumbent or a new entrant?” and “How will the debate on financial regulation affect this?”

Some of the answers may come from the second book – even though it is not about financial services but another “problem industry” – American healthcare provision. The Innovator’s Prescription is by Harvard’s Clayton Christensen. The initial chapter is available online – it is worth a read.

Christensen believes that fundamental change comes from disruptive innovation. This consists of four things - a simplifying technology, a business model innovation, a disruptive value network and finally regulation and/or standards that facilitate change.

He says that regulation needs to facilitate business model innovation in particular. His research shows that, while simplifying technology may come from incumbents, business model innovation is almost always forged by new entrants to the industry.

This suggests to me that future opportunities to deliver financial services in ways that advance sustainable development will depend critically on what emerges from today’s debate on financial regulation.

Would dethroning GDP help build public support for the changes ahead?

As the Financial Times reported recently the Kingdom of Bhutan focuses on Gross National Happiness (GNH) instead of GDP: "the theory behind GNH is simple – economic growth is not the end in itself but a means to achieve other aims, such as peace, security, greater well-being and happiness". The article goes on to describe similar initiatives that are underway across the world, from France to the USA to within the OECD.

In fact research shows that although GDP has grown in the developed world over the last few decades, well-being has stagnated. In "Happiness: Lessons from a New Science" Richard Layard (the UK government’s happiness tsar) argues that money is only one driver of well-being, the others being work, private life, community, health, freedom, and a philosophy of life. I’ve found that this list rings true for most people: there seems to be a growing recognition that "earn more, consume more" is a false god. Even climate and resource crunch sceptics are often interested in finding more effective ways to increase their families’ well-being than consuming to keep up with the Joneses.

There is growing cross party support for well-being to replace wealth as the aim of policy making in the UK, and bottom-up initiatives like Transition Towns that resonate with both the well-being and sustainability agendas are spreading rapidly. Perhaps these are the first signs that shifts in public opinion will support the action governments will need to take to simultaneously improve quality of life and maintain a viable environment for human existence.

The importance of asking the right questions

"It is not the answer that enlightens, but the question” - Eugen Ionesco
“A prudent question is one half of wisdom” – Francis Bacon

As we seek to build a more sustainable financial system, we need to think about whether, collectively, we are asking the right questions. Questions indicate where our priorities lie and can shape norms and behaviours. Questions focus our minds and can get us to the right answers and the right results. The consequence of us not asking the right questions therefore is potentially to turn our focus away from what we actually want to achieve.

In the debate on ownership, can we identify a failure of pension funds at times to ask the right questions of their consultants and fund managers? Has this led to a situation where the consultants and managers assume they know what their clients want and the clients assume that the managers know what they truly want?

Similarly has not asking the right questions blunted the ability of financial advisers and private client managers to fully understand their clients’ needs and interests?

The importance of the right question was highlighted to me by two separate conversations I had with charity trustees last week. On Thursday, I participated in a roundtable on charities and the recession. During the discussion, a leading charity trustee pointed to his ability to ask difficult questions as one of his key contributions to the stewardship of the charities he is involved with.

I then met on Friday with the chair of a leading UK charitable foundation. We were discussing how trustees oversee their investment managers. The key was having the right mix of trustees; both those with experience of the investment industry and ‘novices’, he said. He explained that the ‘novices’ are key because they are not afraid to ask the ‘naïve and daft’ questions.

…. which turns my mind back to where last week began…

On Monday, UKSIF held a seminar with Bob Doppelt, the author of ‘The Power of Sustainable Thinking’. He argues that to create a positive and sustainable future you need to start by transforming your own thinking before you can motivate organisations to change. Central to this is to change the frames through which you see the world. He identifies five key elements and asks us to consider:

what is the problem? what are the stakes? what are the solutions? why now? why me?

Talk about asking the right questions…..

Investors as Owners need to tame the “Perfect Storm”

The role of investors as owners of failing financial institutions moved centre stage at the 2009 NAPF Investment Conference last week.

In his speech, FSA Chief Executive Hector Sants issued a very welcome call on investors to shift the balance of their interests towards their ownership responsibilities. He said “It is critical to recognise that the principal responsibility for managing firms responsibly remains with the management of the firms and that shareholders are the principal mechanism for holding these managers accountable. Shareholders going forward, have a duty, an obligation to make that oversight role more effective.” And he questioned “if there had been more effective and collective shareholder intervention whether the financial crisis we are witnessing would have been as severe”.

Sants said “As owners we would encourage you to focus on four issues: governance, risk management, business strategy and the issue of compensation.”

A key issue is how investors interpret issues of risk and strategy.

Yesterday, the UK Government Chief Scientist Professor John Beddington gave an insight on this. He said the looming crisis of food, energy and water shortages by 2030 would match the current one in the banking sector and result in a “perfect storm”, according to the BBC.

2030 is only 21 years away – as far forward as 1988 is back. Today’s 45 year olds may not even be drawing the pension that they are investing for today while Sir Fred Goodwin will be a mere 71 year old, presumably with many years of pension still before him.

For genuinely sustainable and long-term investment, investors oversight of risk management and business strategy needs to think this far ahead and beyond – and to protect the wealth generating capacity of the global economy as a whole not just of the individual firm.

The Walker Review of the role of institutional shareholders in corporate governance needs to step up to the challenge of encouraging this level of farsightedness.

Can we transform our economy from a forward-moving aeroplane to a hovering helicopter without crashing?

This question is from a series of articles about the troubles that lie ahead for the global economy published in the New Scientist last October. The graphic image it conjures up seems to capture the challenge humanity faces this century. Avoiding a crash will be tricky!

The New Scientist elegantly shows that despite technological advances we’re rapidly overshooting our planet’s carrying capacity: the average person is still consuming more of the planet’s resources every decade and we are currently increasing our global population by over 200,000 people a day. Ecologists know that if this continues our population will collapse.

However, the New Scientist offers its readers an optimistic scenario for 2020 based on a "steady-state" economy that is thriving within ecological and political limits set by science and society. There are clues in the scenario about how we’ll get from here to there, but not about how the social and political will to change developed so quickly.

Will the leaders of the G20 nations focus on patching up and redesigning the aeroplane? Or will they take the opportunity the current crisis provides and create genuinely sustainable recovery? As Prince Charles said recently "any difficulties which the world faces today will be as nothing compared to the full effects which global warming will have on the world-wide economy".

Building a Resilient Financial Services Sector – Think Small Too?

“Think Small First” is the rallying cry for the European Small Business Act agreed by member states in December 2008.

But could this be the message for every sector except financial services? If so, an opportunity to build a resilient financial services sector will be lost.

In the same way that SMEs are central to innovation in other sectors, we need small and innovative financial services providers as part of the mix to deliver resilient and effective allocation of capital for sustainable development. So financial services regulation must be appropriate for SMEs delivering sustainable financial services as well as for large and systemically important players.

Ethical banks have been one of the success stories of the current recession. In the last few years, new financial intermediaries that channel venture capital to social businesses have started to grow in number.

And Zopa, Kiva and similar innovators are harnessing the power of the internet to enable people to bypass the banking sector altogether.

Of course, large financial institutions need to be well regulated and how this is done is key to the efficient allocation of capital for tomorrow’s economy. And large businesses in other sectors are likely to move into financial services over the coming years and regulation must enable this too. After all, mobile phone companies already provide payment services in parts of Africa.

But some of the innovation and creativity in financial services for sustainable development will come from new and small providers. Civil society organisations are already debating the opportunities for new financial services mutuals – identified as a “burning issue” by the Carnegie UK Trust’s Inquiry into the future of civil society or see Rosamund McCarthy’s article in Third Sector magazine this week. We may see a new wave of innovation replacing the consolidation of recent years if regulation permits this.

At first glance, the Turner report seems to recognise this – distinguishing between measures for systemically important firms and for others. But the devil may be in the detail.

“Think Small First” may be too much of a challenge for the emerging debate on the regulation of financial services. But “Think Small Too” is not – it is essential.

Green Bonds for a Green Stimulus?

Investor interest in green stimulus packages is growing. Earlier this week, a group of investors, supported by UKSIF and Tomorrow’s Company met for the second in a series of roundtables to explore how economic stimulus packages could be encouraged to accelerate the transition to a low carbon, resource efficient economy.

Stimulus packages need to leverage private investment into the new green economy, they said. And there is an emerging consensus that well designed “green bonds” are an important part of this. Because this investment is urgent, these bonds need financial characteristics already well understood by investors. They need to look attractive as conventional fixed income investments not as something new and different that can justify only a cautious toe in the water for the next few years.

Luckily, there is already a good example to follow in the work of the International Finance Facility for Immunisation which works with the GAVI Alliance and the World Bank. The IFFIm has created and placed institutional bonds backed by government commitments to bring forward funds for vaccination.

And, separately, the UK government has already welcomed the HSBC Vaccine Investment ISA that allows UK retail investors to join institutional investors in investing in vaccine protection at a competitive rate of return. It is open until 24 April 2009.

The challenge now is to build rapidly on this experience – developing products for pension funds, insurance companies and other institutional investors initially and perhaps also for retail investors later.

Welcome to the UKSIF "Finance for a Sustainable Recovery" Blog

Welcome to UKSIF's blog "Finance for a Sustainable Recovery". This blog comments on progress in creating a robust operating framework for sustainable and responsible financial services.