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Social assets have economic value
A pandemic lays bare the social infrastructure on which the economy depends. As the social requirements of COVID-19 affect so many forms of economic activity – from education to entertainment – we glimpse connections we ordinarily never see.
We’ve glimpsed the value of work that is rarely celebrated: people driving trucks and restocking supermarkets; shift workers cleaning hospitals and driving buses; people manufacturing hygiene products or medical equipment in factories around the world. When our well-being and that of our families depends on the contributions of distant strangers, we have a direct interest in their access to adequate sanitation, healthcare, and the shelter and nutrition necessary to support this.
We have been reminded too of the vital role of ongoing intellectual investment. Hopes for COVID-19 mitigation, prevention and treatment lie in research incubated at universities and other institutions across fields as varied as social psychology and materials science. Our ability to respond to the health, social and economic challenges depends on the depth of expertise and experience cultivated there over decades.
We see the necessity too of community cohesion. Whether staying home to ‘flatten the curve’ or risking one’s health to help others, mobilisation against the common foe requires community solidarity. Reciprocity needs to have been previously established through individuals’ connections to their communities and their community’s support of them.
Finally, and most importantly, we are (re)discovering that trusted and trustworthy institutions and leaders are critical to the functioning of an economy. The integrity and capability of leaders and those in positions of authority matter most obviously in a crisis, but these need to be prioritised well before a crisis materialises.
Recognise and value social assets
Universal investors are economic investors. They have interest in the social assets on which the economy and investment returns depend. The importance of these is apparent in a crisis, but vigilance is most critical during better times, when market-oriented voices are louder and the erosion of social assets can occur beyond investors’ view.
One reason this can happen is that the data that dominates reporting is substantially based on financial transactions (e.g. EBIT, GDP, or market returns).
Asset values independent of financial transactions (including social assets) are therefore not encapsulated in metrics by which investors currently steer.
Investors need better ways to understand and monitor the shared social assets on which their portfolios rely. The Sustainable Development Goals, having been established to support socio-economic development within and across countries offer a solid starting point, adaptable to all countries. However, while numerous tools have been proposed (beginning with Triple Bottom Line reporting decades ago) and are prevalent in other sectors (e.g. development banks) they remain underdeveloped and under utilised by universal investors.
Universal investors must work together to develop standardised, fit-for-purpose tools that ensure their social assets are fully accounted for.
Protecting social assets from markets
Markets are not just inattentive to socio-economic assets, but often an active threat. The corporate form optimises for the company and discourages prioritisation of shared social assets. For instance, a pharmaceutical company has no reason to welcome competition that keeps drug prices low for consumers, and still less interest in non-medical prevention of the disease altogether. Protecting social assets such as public health is therefore entrusted to governments on behalf of the communities they represent.
However, governments come under intense pressure to bend regulation to favour interest groups. Companies, industries and their agents (including membership organisations) lobby and advocate to achieve favourable regulation. Examples include commissioning industry research, drafting friendly legislation for time-poor government staff, or assiduously cultivating shared world-views through fundraisers and similar events. When this influence is successful, it is known as policy capture.
When the influence extends to securing governments that will favour these interests once in power, capture reaches the level of clientelism. This corrupts the quality and integrity of all decisions, which are necessarily compromised when a decision-maker lacks the public interest priorities, integrity or competencies necessary to steward social assets in the community’s (and thus the economy’s, and investors’) interest.
To protect the value of social assets on which their returns depend, universal investors should address capture through their stewardship activities.
Focus engagement and voting on shared social assets
To address capture that undermines shared social assets, investors need to focus on the following corporate activities:
– lobbying / advocacy to lawmakers or authorities, including commissioning supportive research
– financial or in-kind support of lawmakers or their agents (including political parties or election campaigns)
– public communication on social / economic issues, or issues of a politicised nature.
– funding, branding or other support for any of the above. This includes industry groups or other third parties (e.g. media outlets, political action groups, foundations).
Scrutiny of corporate policies, oversight arrangements, management and reporting are familiar paths for most responsible investors active on ESG issues. However it is uncommon for investors to focus these mechanisms on matters affecting economic value (versus company profits). For example, one asset manager’s proxy voting policy at the time of writing states that it will oppose even disclosure of a company’s policies on political contributions, lobbying and trade association spending in the absence of significant controversies or litigation.”
Policies such as this, which frustrate scrutiny of corporate impact on investors’ social assets are grossly inconsistent with the interests of universal investors.
Advocate for principled political economy
Conventional active ownership is necessary but not sufficient to protect shared social assets. Ensuring a principled approach to political economy requires champions. This is discomfiting for many investors who are averse to involvement in matters with political dimensions. There are several reasons to overcome this reticence.
First, while universal investors avoid politics, those with contrary agendas are not so hesitant. If universal investors do not make the case for social assets as economic assets then individual companies, industries or markets will be incorrectly perceived to represent their investors’ economic interests when this is not the case (e.g. lower corporate taxes versus adequate government spending on public health).
Second, any issue can be made political by those who find consensus is inconvenient. For example, there is nothing inherently political about the issue of climate change, and there was consensus on climate action in Australia until a deliberate and well-funded strategy of politicisation undermined this. This politicisation caused many investors and others in the business community to silence or moderate advocacy for economically sound climate policy.
Third, and most problematically, the priorities of companies, industries and markets align more readily with political groupings whose defence of common social and economic assets is weaker. Their empowerment can be devastating for universal investors, their beneficiaries and stakeholders – as seen (for example) in the consequences of some governments delaying efforts to suppress COVID19 in defiance of disinterested expert advice. This occurs equally on issues such as climate action, persistent underfunding of institutions and entrenchment of inequality. There are critical differences between a government that is market friendly and one which is a good steward of the economy.
Identifying good economic policy settings will require investors to understand and demonstrate how social assets contribute to economic performance. The work of the Business and Sustainable Development Commission to identify the economic benefits of achieving the Sustainable Development goals is one such example. A more extensive evidence base would be a worthwhile object of universal investor collaboration.
But investors will need to use this evidence base to inform forthright, persistent, collective investor action. This should target principled policy and decision-makers capable of stewarding shared social assets. In places where this diverges from current arrangements, more significant investor efforts will be required to correct course.
For all its terrible devastation, COVID-19 also highlights the economic importance of shared social assets. When it is behind us, other challenges will (re)emerge. The sooner our industry can lend its weight to rebuilding and defending shared social assets, the better positioned our portfolios will be to weather them.
Susheela Peres da Costa is Head of Advisory at Regnan
She also chairs the Responsible Investment Association of Australasia and co-authored with PRI Director of Stewardship Paul Chandler, Active Ownership 2.0, a proposed aspirational standard for improved stewardship.