A New Age of Purpose Led Finance
The growth and adoption of responsible investment is a global phenomenon. Time and again over the last few years we have heard that a tipping point has been reached. That responsible investing is mainstream.
In Australia the numbers support this contention, half of professionally managed assets are managed under responsible investment strategies, four times what they were a few years ago. Mainstream investors have adopted approaches previously frowned upon, for example we have seen the exclusion of tobacco from over 40 Australian superannuation funds, including Australia’s largest.
Outside of Australia we have seen the world’s largest pension fund invest US$10bn in ESG indices. The world’s largest sovereign wealth fund divesting coal assets. The world’s largest fund manager vote against two directors on the board of the world’s largest listed oil company over climate change. The entire New Zealand pension industry implement ethical screens over default KiwiSaver options. These are not fringe events.
Increasingly though responsible investment is less defined by what we won’t invest in but what we will. The oversubscription of many of the US$103bn in green bonds issuance in 2017 (up from $81bn the year before) is evidence of that.
So too is the growth in impact investment which continues to surpass all expectations. The Australian Government’s support, while small at $30m, is significant in its acknowledgement of the potential this investment approach has for improving social and environmental outcomes. State governments too have shown support with the $1.1bn social housing fund managed by TCorp being the most significant example of this and smaller social benefit bonds providing an important incubator for new investment structures.
This is all great news but when we step back and look at it in context we are still closer to the beginning of the journey than the end. The increasing impacts of social and environmental crises like climate change, inequality, failing governance (e.g. tax avoidance and political influence) and tensions between these issues and achieving sustainable development objectives are clear and urgent. From the World Bank to the UN to the World Economic Forum the essential role of private capital in addressing these issues has been highlighted again and again.
As stewardship codes have been adopted around the world, the connection between these issues and the stewardship responsibilities of institutional investors is being made by an increasing number of stakeholders. With a pension system that is larger than Australia’s GDP, institutional investors cannot avoid the negative impacts of these issues or their role in addressing them.
The public’s expectations of institutional investors in this regard has also increased. Polling by Lonergan released at the Responsible Investment Association of Australasia’s (RIAA’s) annual conference found that 9 out of 10 Australians expect their superannuation to be managed ethically and responsibly and 8 of 10 would switch super funds if they found their fund didn’t align with their values. These numbers are extraordinary and a significant increase on the same questions asked just three years earlier.
However, investors and finance more generally have been slow to adapt. Only 16 of 91 Australian fund managers assessed by RIAA can demonstrate systematic processes for integrating environmental, social and governance (ESG) considerations.
This contrast between the public’s expectations and our delivery on them poses a social license to operate risk for the industry.
The risks to our industry’s social license to operate goes beyond approaches to responsible investment, they extend to the very foundation of the financial system – trust. The 2017 Edelman Trust Barometer shows that while trust in financial services has increased since last year it remains amongst the least trusted industries, with advice and asset management among the least trusted within financial services. According to Edelman one of four areas where financial services can build trust is by focusing on social purpose and having positive real-world impacts. The connections between responsible investment, effective stewardship and filling the trust deficit are clear.
However, doing so requires moving beyond incremental and inward-looking approaches to finance, it requires the recasting of our industry’s purpose to meet real world 21st century needs.
The BFO plays an important role in that effort by raising standards of individual accountability. As do organisations like RIAA who raise standards of transparency and benchmark performance of organisations. This meeting of the individual and the organisational should be founded on strong shared beliefs. These could include that:
1) Trust is the foundation of our industry and the ethical conduct of its participants is a prerequisite to sustaining our social licence to operate.
2) Investment practices directly impact and indirectly influence the health and well-being of people, society, the environment and the economy, this influence and our modern understanding of these connections confers significant responsibilities on on investors.
3) Through the alignment of financial objectives with the broader interests of society - such as those set-out in the UN’s Sustainable Development Goals – we can establish signposts to guide our actions and the allocation of financial capital.
4) By doing so we recognise that satisfying the expectations and investment needs of beneficiaries relies upon the positive environmental, social, governance and ethical performance of the assets, enterprises and activities invested in.
5) The effective collaboration of like-minded investors and other stakeholders is important for achieving these shared objectives.
On foundations like these the industry can recast its purpose in a way which honours our duty to beneficiaries to deliver financial returns in a way that also has a positive impact on society and respects environmental boundaries. It is the key to rebuilding trust.
The time has come for a new age of purpose led finance, let’s continue to develop and advocate for this idea together