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In 2010, UKSIF is championing sustainable capital markets by influencing and supporting public policy and investor behaviour on:

• Responsible Ownership through effective implementation of the Stewardship Code and related measures

• Financing a Low Carbon and Sustainable Economy through green bonds and other socially useful financial innovation

• Further Innovation and Cultural Change in financial services to better meet the long term needs of providers and users of capital and advance sustainable development at the same time

For more on our support for sustainable capital markets, please visit the regulation, standards and public policy section of the UKSIF web site.

Thank you to all who participated in the debate in 2009.

Progress towards Sustainable Capital Markets

This blog was launched nine months ago to track progress in building more sustainable capital markets. Now seems a good time to reflect on this year’s developments. From a UK perspective, which are the most significant signals of future change?

Here is my list of the key trends from 2009:

• Civil society starts to demand a more accountable finance sector

Eg. Anger at remuneration levels, Deepening of NGO research and campaigns

• Politicians, regulators and industry leaders increase support for good governance of asset owners and more responsible ownership of assets

Eg. Lord Myners’ emphasis on “ownerless corporations”, The Pensions Regulator’s governance campaign, the Walker Report’s Stewardship Code recommendations, Personal Accounts Delivery Authority Investment Consultation responses

• Modern green and ethical retail investors and their advisers seek positive ways to make money and make a difference with some of their investments

Eg. YouGov research for National Ethical Investment Week 2009, Conservatives commit to “Green ISAs”

• Stock exchanges deepen their focus on support for sustainability

Eg. World Federation of Stock Exchanges publishes interactive “Exchanges and Sustainable Investment” report, UN hosts sustainable stock exchanges event

• Bonds and other financial instruments for sustainable infrastructure move up the agenda

Eg. HSBC’s Vaccine Bond, second and third issues of World Bank green bonds, the Climate Bonds Initiative

In twelve months time, will these still seem like the key developments in 2009?

Capital and Control

The flow of reports and comments in the run-up to both Copenhagen and the final recommendations of the Walker Review continues this week.

“Catalysing low-carbon growth in developing economies: Public Finance Mechanisms to scale up private sector investments in climate solutions” is the latest on “capital” for the low carbon economy. It was launched today by UNEP in partnership with an impressive range of pension, investment and insurance organisations.

Meanwhile, on effective shareholder ownership and “control”, I was struck by this piece “not more regulation, more Responsibility” from Colin Melvin of Hermes in Sunday’s Independent.

Reforming Ownership and Capital Markets

UKSIF has recently submitted responses to the Walker Review of Corporate Governance of UK banks and other financial institutions and to HM Treasury's 'Reforming Financial Markets' consultation. We have also responded to the second consultation in the 2009 Review of the Combined Code. All three responses can be found here.

Learning from corporate responses to environmental regulation

How can financial institutions best respond to today's regulatory debate?

The article 'Why sustainability is now the key driver of innovation' from September's Harvard Business Review has already been blogged about elsewhere (e.g. here).

But I think it is still worth highlighting that banks and financial institutions could find its model useful in rebuilding trust and profitability. C.K. Prahalad and colleagues propose this five stage model:

Stage 1: Viewing Compliance as Opportunity

Stage 2: Making Value Chains Sustainable

Stage 3: Designing Sustainable Products and Services

Stage 4: Developing New Business Models

Stage 5: Creating Next-Practive Platforms

No more business as usual

I have just contributed an opinion piece "Responsible investment: No more business as usual" to the Ethical Corporation website.

It is based on my article in Green Alliance's pamphlet "From crisis to recovery: New economic policies for a low carbon future".

Ethical Corporation is doing a series of opinion pieces from members of their editorial advisory board - of which this is just one. FTSE's Will Oulton, for example, has contributed "Green investment grows up".

Call for ESG Disclosure from "Across the Pond"

Earlier this week, a coalition of over 50 investment firms and professionals led by the US SIF called on the Securities and Exchange Commission (SEC) to require listed companies to report on ESG issues.

They asked the SEC to mandate annual reporting on sustainability indicators in accordance with the GRI framework and on other material ESG matters.

This follows Eurosif’s call on European institutions in April to require disclosure of ESG data by listed companies.

These initiatives give additional support to the view that improved reporting will help strengthen financial markets and foster sustainable business practices.

From Crisis to Recovery: Reshaping Capital Markets

I have contributed a chapter on sustainable capital markets to a new Green Alliance pamphlet “From crisis to recovery: New economic policies for a low carbon future".

In it, I describe our policy recommendations to tackle the underlying issues that drive today’s dysfunctional investment approaches. We think this needs not just better regulation but also improvements to leadership, cultural norms and external scrutiny.

Specific proposals include:

• Pension funds and other major investment owners should be required to report on how they implement their sustainable investment policies
• Publicly owned investment holders should be required to be responsible owners and report annually on their progress
• Greater transparency should be demanded of both companies and institutional investors
• The objectives of financial regulators should enable them to take greater account of the wider public interest, including sustainable development.

It would be great to have your comments on these suggestions and the rest of the chapter.

Walker Review consultation document published

Recommendations from the Walker Review have been published in a consultation document today.

UKSIF will be responding over the summer to this and to last week’s HM Treasury report “Reforming financial markets”.

Do please respond to these too. Deadlines are 30 September (HMT) and 1 October (Walker).

Practical Regulation for "Desirable Social Objectives"

Over the last few weeks, UKSIF has been responding to consultations on financial reform and on information disclosure by pension funds.

I notice that, speaking in China recently, FSA Chairman Adair Turner said “We need above all to see markets not as ends in themselves, but as tools to achieve desirable social objectives. Financial markets have major and important roles to play in ensuring the allocation of capital to most efficient uses. But they will not operate perfectly and smoothly without effective regulation and oversight.”

The UKSIF web site now contains our response to the Turner Review, our recommendations to the 2009 Review of the Combined Code, and our comments on the Office of Fair Trading’s Financial Services Strategy.

We also responded to the DWP “Review of Disclosure of Information Requirements applying to Occupational, Personal and Stakeholder Pension Schemes” to call for government action to require greater transparency by pension schemes about responsible investment policies and their implementation. This built on the low level of transparency identified in our “Responsible Business: Sustainable Pension" 2009 report published earlier this month.

Our consultation responses have all focused on practical regulation and oversight measures to achieve desirable objectives for the real economy, society and the environment.

UKSIF-Oxfam Meeting with Financial Secretary: Common Priorities for Financial Reform

A joint delegation of responsible investors and leading NGOs met recently with Financial Secretary Stephen Timms MP. It was led by Paul Abberley, Chief Executive of Aviva Investors London and convened by Oxfam GB and UKSIF.

The delegation demonstrated how a common agenda is emerging between responsible investment leaders and major NGOs on priorities for financial reform to achieve a sustainable recovery. We discussed priorities for both UK and International/G20 action.

Our list of priorities is now available, as “Financial Reform for a Sustainable Recovery: NGO and Responsible Investor Priorities”, on the UKSIF web site.

Inspiration not just Regulation: FT Sustainable Banking Award winners

Congratulations to Triodos Bank, crowned as “Sustainable Bank of the Year 2009” at last night’s FT Sustainable Banking Awards, and to runner up Standard Chartered.

As the deadline for comments on the Turner Review approaches, it is good to have both as inspirations for the future of banking and – to declare an interest - as UKSIF members.

Some of us remember the early days of Mercury Provident (founded 1974), the tiny UK industrial and provident society that merged in 1995 with its Dutch sibling (founded 1980) to bring the Triodos Bank name to the UK. Its early supporters will feel vindicated by this proof that new entrants can indeed establish a different vision of banking.

Equally, Standard Chartered, founded 1853 and 1863 to meet British Empire banking needs, shows that incumbents can adapt to today’s new challenges; while the candidates and winners for “Emerging Markets Sustainable Bank of the Year 2009” and the other awards together give a powerful glimpse into a positive future for banking across the globe.

But my fear is that well-intentioned financial reform may inadvertently prevent the emergence of the 21st Century’s equivalents to Mercury Provident. Today’s challenge for financial regulators is to support innovation and inspiration as well as controlling the dysfunctional.

Photographs from the event (available here) include former UKSIF Vice Chair Charles Middleton accepting the award on behalf of Triodos Bank and the table I shared with fellow guests from emerging market winners Itaú Unibanco (Brazil) and Industrial Bank (China) and others.

Beyond regulation: PIRC and Aviva Investors on ownership and capital market reform

I am more and more convinced that apparently robust interventions like improved regulation will deliver effective ownership and sustainable capital markets only if there is associated cultural change. This is not an argument against regulation – but it is an argument against regulation alone.

It is good to see a range of proposals now coming forward on responsible ownership and capital market reform – but one test is how they will change cultures and norms so that new behaviours are “what we believe in doing around here” rather than “what our compliance department says we have to be seen to do”.

Anita Skipper, Corporate Governance Director at Aviva Investors and Alan MacDougall and his colleagues at PIRC have both just published thoughtful contributions to the debate.

Introducing PIRC’s “Manifesto for corporate governance and capital market reform”, Alan says “Too many institutions fail to take their ownership responsibilities seriously, therefore post-crisis reform must consider their role too. There can be no return to business as usual.” The manifesto aims to “stimulate debate and spark further ideas, but most importantly to begin the process of pulling together ... radical but realistic policy reforms”. PIRC is seeking comments on its suggestions.

Anita’s piece “Corporate governance and the economic crisis: what can shareholders do differently?” appears in Aviva Investors’ The Investors Journal (Volume 3). (NB. To get access, just click either “I am a private investor” or a more appropriate category.)

She highlights barriers to good governance including “Lack of client interest”, “Human behaviour” and “Managing conflicts of interest”. Her solutions include “More client focus on governance” and “Focus on culture”.

Importantly, she says “With the right corporate culture in place, companies, boards and fund managers are more likely to make the “right” decisions, irrespective of any weaknesses of accountability, regulation, accounting standards and conflicts of interest.”

An opportunity for accountable capitalism

Government proposals on financial market reform will be published before the summer, said the financial stability section of yesterday’s budget report.

I hope these take on board the recommendations in a recent paper by David Pitt-Watson and his fellow authors of “The New Capitalists”. “Towards an Accountable Capitalism” has been published in a couple of versions – as a “Private Sector Opinion” by the International Finance Corporation’s Global Corporate Governance Forum and as a paper for IPPR’s Tomorrow’s Capitalism programme.

It highlights that “a successful economy is not just about the tensions between two separate poles: regulation or market. An economy which works effectively is like a political system which works effectively: It has checks and balances, accountabilities and responsibilities, information flows and cultures. Of course regulation is important. But there are five central principles beyond regulation on which a successful financial system depends. These are:

• That the entities in it are responsible for their actions.
• They will be responsible if they are accountable.
• Those who call them to account will need relevant information.
• That information must be independently prepared.
• And just as a healthy political system hinges on the scrutiny of vigilant citizens, a successful financial system will need the oversight of vigilant market participants."

Regulation alone will not deliver tomorrow’s sustainable capital markets. “Towards an Accountable Capitalism” offers an important steer on much of what is needed as well.

Has Turner reclaimed “bravery” from Sir Humphrey?

I spot one achievement from the Turner Review already. It may have legitimised “bravery”.

The 1980s comedy “Yes, Minister” embedded the terms “brave” and “courageous” deep in the British psyche as synonyms for “politically suicidal”. But now, some twenty five years after Jim Hacker and Sir Humphrey left their Ministry for Administrative Affairs, this could be changing.

Such is the FSA’s language shaping power that not only are we now all considering “outcomes-focused regulation” but also the need for genuine bravery.

The Turner Review Discussion Paper says that “The new model of supervision … requires a ‘braver’ approach to decision-making by supervisors” (ie. by regulator employees) and the FSA aims to have a culture that “attracts and retains quality people who act in a ‘brave’ and ‘decisive’ manner”.

Talking to others in pensions and investment recently, I get the impression that this is having an impact. With this FSA support, suddenly bravery has become a more respectable characteristic.

Many would say that - with notable exceptions - bravery has not traditionally been a strong feature of the culture of pension fund trustees and managers. But, as Hugh Wheelan’s recent Responsible Investor article highlights, trustees like the PRI’s Chair Donald MacDonald have stepped forward to share responsibility for the crisis with a notable demonstration of what we might call the “new bravery”.

I look forward to “bravery” becoming a core competency within City job specifications. It is part of the answer to one of today’s key challenges: “How do you regulate for character not for compliance?” After all, as FSA Chief Executive Hector Sants said recently “a principles-based approach does not work with individuals who have no principles”.

Did the London Summit do enough to deliver a sustainable recovery?

NGO responses vary. Oxfam's Duncan Green is “unusually optimistic” but Friends of the Earth are not. The ‘Put People First’ coalition reflects that mix of views.

Personally, I homed in on paragraphs 21 and 27 of the G20 communiqué.

First, Paragraph 27. It reads “We agreed to make the best possible use of investment funded by fiscal stimulus programmes towards the goal of building a resilient, sustainable, and green recovery. We will make the transition towards clean, innovative, resource efficient, low carbon technologies and infrastructure. We encourage the MDBs to contribute fully to the achievement of this objective. We will identify and work together on further measures to build sustainable economies.”.

While short on specifics, this sets a collective goal against which the G20 can be judged when it meets again later in the year. It gives a good basis for investors to engage further with governments and development banks in the coming weeks.

Paragraph 21 is more intriguing. It says “..we agreed on the desirability of a new global consensus on the key values and principles that will promote sustainable economic activity. We support discussion on such a charter for sustainable economic activity with a view to further discussion at our next meeting. We take note of the work started in other fora in this regard and look forward to further discussion of this charter for sustainable economic activity.”

Could this be the start of a genuine debate?

Is it the first step of a global transition from GDP towards new measures of prosperity? And towards the new approach to incentives, rules and policies that would follow this shift?

So, overall, I would say – “the jury’s still out”. The direction of travel is positive, but there is still much to do. Policy makers need to deliver not just an effective global banking system but also a major economic transition, including sustainable capital markets for long-term responsible investment. The G20 has only started the process of delivering a sustainable recovery and, by their next summit later in the year, further major milestones need to have been reached.

UKSIF joins with global partners to demand green action from G20

UKSIF has joined with our sister organisations across the globe to send a message to world leaders meeting in London tomorrow to address the global financial and economic crisis.

Our statement outlines measures that world leaders can take to drive the transition to a low-carbon, resource efficient and socially sustainable economy.

This is the first time since the Earth Summit in 1992 that the global network of sustainable and responsible finance organisations has issued a collective statement.

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.