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Responsible Resolutions: This is the latest article in a series from sustainable finance practitioners about their hopes for the New Year.
It’s already clear that 2020 will be a big, busy year for the sustainable finance industry. Climate will dominate – again – for the very good reason that the world’s governments will gather in Glasgow at the end of the year for the most important climate negotiations since those that delivered the Paris Agreement five years ago. In 2015, at COP21, the role of private finance was already becoming prominent; this year it’s likely to be an even bigger story as governments with big budget deficits look to pension funds and other long-term investors to allocate more of the capital needed to decarbonise the global economy in line with the pace dictated by climate science.
COP26 is only one of many factors driving the investment industry, not always enthusiastically, to grapple with public interest issues. The climate emergency is merely the most prominent of a wide range of human-induced global challenges in which large private companies held by the world’s pension schemes and asset managers have – wittingly and unwittingly -played a leading role. These challenges include precipitous declines in non-human species from insects to apes, a global obesity epidemic, and the many unsettling implications of widening inequalities within countries around the world.
"Governments will look to pension funds and other long-term investors to allocate more of the capital needed to decarbonise the global economy"
These varied problems have enormous implications for fiduciary investors and their beneficiaries. The school of thought that says fiduciary investors fulfil their legal duties through a deliberately blinkered effort to maximise portfolio returns looks increasingly untenable for the 2020s. A younger generation of pension savers expects the professionals looking after their assets to avoid investing in companies and activities that damage their generation’s chances of a prosperous, healthy and secure retirement, even where such investments deliver decent dividends and capital growth in the short term. It’s not only millennials. Survey after survey demonstrates that large swathes of the investing public want active and skilful stewardship of their assets, not simply to enhance risk adjusted financial returns but also to improve companies’ impacts on the environment and on vulnerable consumers and workers. As we enter 2020, public demand for responsible investment is as high as it has ever been.
These changing public expectations place additional strain on the investment sector, unavoidably so. Older fund managers no doubt longingly remember a simpler world where this ESG malarkey didn’t impose itself on the craft of stock picking and where NGOs weren’t scrutinising every shareholder vote. They may regret it, but that world is gone. The sheer scale, growth and influence of private capital assets, hugely outpacing GDP growth year after year, makes it inevitable that societies will demand more transparency, responsibility and accountability from the largest institutional investors on the planet. Ultimately, people want an investment industry that serves the private interests of clients and beneficiaries whilst taking responsibility for the impacts of investment decisions on the wider public interest.
"Does the investment industry employ enough biologists, computer scientists, and epidemiologists to be able to make the best decisions for the investing public?"
This brings me to my New Year’s wish for the investment sector. If the sector is to advance both private and public interests, it needs a workforce that reflects the societies it serves. The investment sector does this poorly today. Some of the starker facts on gender diversity in fund management have generated a few headlines, but overall the argument has not been won that the investment and pensions industry cannot and will not deliver what clients increasingly expect without a workforce that evolves to meet their changing demands.
Three years ago, the British civil service published a visionary yet practical strategy document called A Brilliant Civil Service: becoming the UK’s most inclusive employer. The document states that “the Civil Service must represent modern Britain in all its diversity. Evidence shows that diversity – of background, of life experience – brings different insights, creates challenge and encourages change and innovation. This in turn produces more accountable and trusted public services and better decisions – better because they are more attuned to the needs and interests of all our communities.”
This statement perfectly captures why, in the 2020s, the global investment sector should adopt a more ambitious and high-profile approach to diversity and inclusion. If the powerful individuals making and shaping investment decisions, from pension trustees to investment consultants, portfolio managers to financial regulators, reflect the diversity of the societies they operate within, those professionals will make better decisions, win the public’s trust and serve more faithfully those whose interests they are paid to advance.
Defining diversity is the first step. Yes, the industry’s efforts to improve diversity should include sex, gender identity, ethnicity, sexual orientation, disability, faith, age and socio-economic background, but it should also include drawing in people with the skills and experience to make better investment decisions in the context of climate risks, biodiversity loss, cyber-crime and other fast emerging ESG risks. Does the investment industry employ enough biologists, computer scientists, and epidemiologists to be able to make the best decisions for the investing public?
Beyond diversity, is inclusion. Who should be included? Who should be heard? This transcends workforce questions to encompass a commitment to bringing the voices, experiences, values and perspectives of savers and clients properly into the picture. An inclusive investment industry is one that listens and responds to those it serves. The EU's Sustainable Finance Agenda has set in motion changes that would see investment advisers asking a richer set of questions of clients about their ESG preferences and values. That’s a very good start. The same practice can and should extend to pension schemes, where some of the leading players are already grappling with how to have a better conversation and a more respectful engagement with the working people who entrust them with their savings each month.
Responsible investment exploded in the last decade. If the next decade is going to see the promise and potential of responsible investment fully realised, the investment sector must step up significantly on diversity and inclusion. The public sector's efforts can be one powerful model for this. Everyone with a stake in the investment sector, whether employed in it or simply using its services, can be a vocal champion of this transformation.
Catherine Howarth is CEO of ShareAction. Her Twitter handle is @ca_howarth.