This week sees world leaders of the G20 group of nations come together for the London Summit. One of their key challenges is to ensure that capital markets support rather than hinder a sustainable recovery. As Kemal Derviş, until recently head of the United Nations Development Programme (UNDP) and a former Turkish government minister, wrote in the Financial Times last week: “Part of the fundamental rebalancing will have to involve a regulatory framework and corporate governance that ties rewards to longer-term performance” and “The costs of the financial crisis may pale in comparison to some of the long-term risks attached to irreversible global climate change, pandemic diseases and nuclear weapons proliferation.” Responsible investors have a central role to play in rebuilding economies and capital markets for sustainable wealth creation. As Responsible Investor has highlighted, leaders among them are stepping up to this challenge. But governments must provide the right frameworks and support to enable them to succeed. I see an emerging consensus among responsible investors about how governments should achieve this. There are two main components.
The first is to “green” the direct measures taken to support the recovery. For example, a strong green focus within the various fiscal stimulus packages. These packages need to support the transition to a low carbon,resource efficient and socially sustainable economy if they are to deliver a recovery that will last. And governments need to leverage in private sector investment in addition to public spending to give the resources needed to accelerate that transition. The second is to reform capital markets to address the market failures that currently stand in the way of fully integrating ESG issues into investment ownership and decision making. Measures that may be needed include:
- Supporting or even requiring fiduciaries to act as long-term responsible owners, including potentially clarifying their duties to their beneficiaries.
- Aligning incentives, increasing transparency, removing conflicts of interest and enabling positive innovation (“innovation for sustainability”) in the investment supply chain between the providers and users of capital.
- Requiring companies and other users of capital to provide long-term responsible investors with the information and dialogue that they need to integrate ESG issues into their decision making.
For both the immediate measures and the longer-term
reform, the development of dialogue between long-term responsible investors on the one hand and government and regulators on the other is key to ensuring solutions that work. This week, responsible investors are looking to G20 governments to further that dialogue and, moregenerally, to have the far-sightedness to address not just the problems of recent months but also those that will result from the range of sustainable development challenges visible on the horizon.
Penny Shepherd is chief executive of the UKSIF – the sustainable investment and finance association