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?

A great Lord Mayor's speech

In his banquet speech last night, the new Lord Mayor called for a re-established social contract between financial institutions and the society they serve.

He suggested that the contract recognise “on the one hand that the UK benefits from financial services, and on the other that we need to do whatever it takes to serve the interests of the individual as well as those of the wider economy”.

The Lord Mayor’s speech also identified that climate change “may be an even greater threat” than the economic crisis. He called for the City to consider, post Copenhagen, how it can build on its leadership in sustainable finance to “do yet more to bring our expertise to bear on building sustainable solutions.”

If this is an early indication, we can expect much from the new Lord Mayor's year in office.

Global Centre Report: A Missed Opportunity for Green Leadership?

Yesterday saw the launch of “Asset management: the UK as a global centre”, a report produced under the joint chairmanship of the Chancellor of the Exchequer and the Chair of the UK’s Investment Management Association.

There is a major missed opportunity in the report. This can be summed up in three words - “carbon”, “climate” and “green”. I searched the PDF for all of them. Each returned “No matches were found”.

So, within a month of the Copenhagen Summit, this significant report on future UK leadership in asset management doesn’t even mention the challenge of redirecting capital towards low carbon industrial and social transformation.

Welcoming the report, Financial Services Secretary Paul Myners said he looked forward to “… the prospect of on-going engagement with the industry on .. the role of markets in society and ethical and moral dimensions to investment”. Lets hope he addresses this!

Is more focus on “having fun” part of the way forward for the finance sector?

As the recent Tomorrow’s Company report “Tomorrow’s Innovation, Risk and Governance” highlights, creating an effective organisational culture is an essential part of building successful and sustainable organisations in the finance sector and elsewhere.

So following my post on the Archbishop of Canterbury’s speech, I was fascinated by this contribution from Cognitive Policy Works on the role of fun (aka motivational psychology) in “saving the world”.

OK, so maybe fun isn’t quite the right term – but what we do need today is more focus on values and culture in the finance sector – and fun isn’t a bad place to start!

Archbishop highlights a shared cultural crisis

Creating a more responsible finance sector requires rebuilding its connection to the wider world and rediscovering a sense of both responsibility for the future of the natural world and joy in making a positive contribution. Or at least that was my conclusion after reading a powerful speech by the Archbishop of Canterbury on climate change delivered last week.

The Archbishop talks about a shared cultural crisis that “could be summed up rather dramatically by saying that it’s a loss of a sense of what life is … a web of interactions, mutual givings and receivings”. He talks about “our calling to nourish” life and secure “a future for all living things”.

He says “a good deal of the talk and activity around the financial collapse has the marks of .. ‘displacement activity’ – precisely because it fails to see where the roots of the problem lie; in our amnesia about the human calling” and “whatever we do to combat the nightmare possibilities of wholesale environmental catastrophe has to be grounded not primarily in the scramble for survival but in the hope of human happiness”.

Even if – like me - you don’t share his religious lens, the speech contains valuable and inspiring insights. Many thanks to UKSIF Vice Chair Helen Wildsmith for pointing me to it.

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

What should a CSR manager do?

My piece in Ethical Corporation calls on CSR managers to play their part by building relationships with their pensions managers and helping them to work with their peers to shift the investment paradigm.

CSR managers looking for an example of good practice by a pension fund today could learn a lot from the Environment Agency Pension Fund's 2009 "Responsible Investment Review" or more generally from its web page on "How we manage our pension funds".

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.

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.”

Time for more transformational leadership?

As Martin Wolf stated at the beginning of the FT’s Future of Capitalism series, although "it is impossible at such a turning point to know where we are going, … the transformation will surely go deepest in the financial sector itself".

The following scenario from a wonderful book for people leading transformational change indicates how radically different financial services could be in the future:

• "In 2025, Philadelpia Quaker Health [PQH] is the most trusted and respected name in health care.
• [It] has close to one billion members globally.
• Once fully vested, members’ income and life care through death is guaranteed and at least half of their economic assets become more fully integrated into PQH’s Intergenerational Trust.
• [Stakeholders] are fully committed to personal, family and organisational initiatives to increase good health … and adult development.
• Senior peers choose their time of death.
• The Good Life 500 [including PQH] has continued to gain market share by comparison to the Fortune 500, the global governmental sector, and the traditional religious and educational not-for-profits".

An easy way for aspiring leaders to keep an eye on the trends that are shaping the context within which their evolving organisations and societies exist is to sign up to Outsight’s "21 Drivers for the 21st Century" e-mails.

These and similar resources help more people develop the "prospective mind" (one that’s ready to help create imaginative systemic change at times of crisis) called for by Thomas Homer-Dixon in the "The Upside of Down".

Investors call for 'green' focus in economic recovery measures

A group of major investors, representing over £400bn in funds under management, has today written to Gordon Brown, as Chair of the London Summit, supporting a strong ‘green’ element in programmes of fiscal stimulus undertaken by government.

The initiative was convened by UKSIF and Tomorrow’s Company.

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.

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".

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.