Gordon Brown, the former UK Prime Minister, has prefaced a new report looking at how institutional investors could challenge the sustainability and systemic risks that have led to significant asset losses – notably during the financial crisis – by saying that both financial and “creeping” sustainability risks of income inequality, global warming, resource depletion and ecosystems destruction, are one of the main “collective challenges” during the course of this century. The report has been published by the International Institute for Sustainable Development, the Canadian-based, public policy research institute, in conjunction with the United Nations Environment Programme Finance Initiative (UNEPFI) and The Blended Capital Group, an advisory firm run by Paul Clements Hunt, the former Head of UNEPFI. It highlights six areas that it says institutional investors should be looking at in order to re-engineer the financial system towards long-term sustainable growth. These are so-called “dark pools” for anonymous off-market trading and over-the-counter markets, institutional investor accountability, stock exchange listing requirements, long-term banking risk and Basel regulations, ratings agencies, and Solvency II regulations for insurers and savings vehicles. The paper suggests current institutional fiduciary responsibility practice is inadequate for taking into account these long-term systemic risks in a “complex, interconnected global financial markets, where product innovation has been such a focus.”It says institutional investors were often buyers of asset-backed securities and derivatives products at the epicentre of the financial crisis and at the same time shareholders in the same financial services groups that were bringing these products to the markets. It points to the current LIBOR scandal as a similar example where investors are exposed both to investment risk, market risk and ensuing legal risk. Ordinary savers, it says, could be affected by LIBOR’s influence on home, education, auto and credit cards loans. Pension funds could themselves be impacted by LIBOR’s benchmark status for derivatives contracts and investment targets. And criminal charges brought in Canada and the United States could lead to further losses for the financial institutions that their asset managers invest in. Barclays in the UK has already been fined $450m by US and UK regulators for manipulation of the LIBOR and EURIBOR rates and other banks are likely to receive similar fines. The report also looks at the policy, regulatory and legal responses to the 2008 crisis, that it says are increasingly trying to incorporate sustainable economic development and productive financial innovation.
The report also makes a series of recommendations for investor action that could bridge this systemic oversight:
- Proposition 1: Build a deeper understanding of how policy-makers, market regulators and international financing institutions can support the
- growth and mainstreaming of responsible investment and inclusive finance approaches. Examine, identify, assess and replicate how innovative approaches can be scaled and accelerated to have a direct impact on meeting basic needs and supporting sustainability.
- Proposition 2: Establish a monitoring body, which ensures that our global financial architecture is managed on sustainable fiduciary principles. The initiative will identify where there are flaws in the architecture, and advocate solutions.* Proposition 3: Investigate why long-term pension investment has not resulted in a financial system that more obviously serves the interests of savers and supports global sustainability.
- Proposition 4: Build on the work of the Integrated Reporting Committee and others to promote transparency in the operations of financial and commercial organizations. This should include ensuring the principles upon which reports are based are sound and sustainable, and that those who provide such information are independent and that it is properly reported.