The global response to the credit crisis has actively encouraged moral hazard – the belief that financial services companies will take more risk if they think that governments will step in and bail them out – according to 64% of respondents from the institutional investment industry to a survey by the Network for Sustainable Financial Markets (NSFM). As a result, just 7% of the investment specialists who answered the open survey during October said they believed the response to the crisis should come from government. Half said they thought the financial industry should sort out its own house, while the remaining respondents suggest that other stakeholders such as consumers and international agencies such as the World Bank should push the markets to change. Significantly, in apportioning blame for the credit crisis, the largest number of investment professionals (21%) said they criticised financial industry insiders such as bank leaders, who many said didn’t understand their risk positions and were incentivised to bet big. Just under a fifth (19%) blamed shareholders and/or fund managers who failed to exercise proper governance on companies or understand the risks in their investments.Politicians and regulators came lower in the blame stakes with 14% pointing the finger their way. Few respondents believe that the crisis will be stemmed by ‘reactive’ government intervention. Instead, half of those answering thought the best response to the crisis would be a 1-2 year global consultation, with the remainder suggesting a medium-term considered view from politicians and regulators. Three quarters (74%) thought the voice of investors should be more important than that of bankers in such discussions, while only 38% thought this was the case today. The survey revealed three reforms that investors believe are almost certain to happen as a result of the credit crunch: more intrusive regulation with stronger penalties, greater scrutiny of executive pay and rewards, and tighter governance of financial institutions. Helen Wildsmith, one of the co-ordinators of NSFM and head of ethical and responsible investment at CCLA, said: “The time has come for the long-term interests of beneficiaries to be firmly placed at the centre of investment decision making. By working together, boards, fund managers, trustees and regulators are more likely to develop a financial system that will withstand the challenges of the twenty-first century.”
The NSFM survey, which was open during October, was completed by 125 investment professionals, with 45% from Europe and 45% from North America. The breakdown was: 19.6% consultants, 15.9% ESG specialists, 15% asset owners, 13.1% fund managers.The NSFM includes some of the world’s most high-profile sustainable investment supporters, including Bob Monks, a former administrator at the US Department of Labour and chairman of Governance for Owners, and Professor Frank Partnoy, one of the world’s leading experts on the complexities of modern finance and financial market regulation.