How does current policy and regulation in the financial services industry support the sustainable growth of impact investing to achieve positive social outcomes?
This was the challenge presented to the expert panel at the Finance for Impact Summit, which included Sacha Sadan, Head of ESG at the Financial Conduct Authority; Catherine Howarth, CEO of ShareAction, Jonathan Labrey, Chief Policy Officer, ISSB; and Clara Barby, Senior Partner, at Just Climate.
The panellists addressed a range of areas where policymakers and regulators could support the industry positive social outcomes goals, including fiduciary duties, stewardship, data and international frameworks.
Addressing misconceptions around fiduciary duties
How do we incentivise asset owners and institutional capital markets to invest more in assets that deliver positive environmental and social outcomes? Pension funds play a major role in this, so it is worth examining the current barriers that exist for them.
One clear impediment to growth is the current fiduciary regime that exists for pension funds. This point was raised by the panel, who noted that there is a prevailing view that a fiduciary duty is focused on optimising financial return for pension scheme members at the lowest possible cost.
This has implications for environmental and social investments. There are, of course, many investment opportunities where achieving a “tremendous” financial return sits alongside positive environment and social impact, for example in renewable energy. However, there are many cases where the two things are not aligned – investments that are well financially rewarded that generate negative impact on environment and society and effectively exploit people and planet.
Catherine Howarth from ShareAction was blunt on this point. “The reality is there is market failure at work”. In her view, the way to address this was for pension trustees to listen more to ordinary people with pension savings. She said there is greater appetite to be “more ambitious on impact investment and on avoiding investments that create negative impacts” among pension scheme members than the fiduciary investors who make decisions on their behalf.
It was time, she argued, for decisions to be “guided by the best interests and outcomes of their beneficiaries” and to acknowledge that “negative impact investments come back on and affect the lives of their beneficiaries.” She pointed to policy reforms and praised the work of the Department for Work and Pensions, who have introduced a number of regulations for pension schemes, helping to clarify issues around the management of environmental and social risks.
Howarth added that she wants to see the government go further on this and pass more reforms that will allow trustees to take the decisions in best interest of beneficiaries, which in some cases might mean prioritising impact considerations even more than they allowed to in the law today.
What does effective investor stewardship look like in practice?
It is widely acknowledged that effective stewardship of companies is critical to achieving environmental and net zero targets. Long-term stewardship of companies and helping them make the necessary changes and investments to undertake the transition is the only effective way of achieving environmental goals in the real economy. The alternative approach for investors to reach net zero – through divestment – whereby investors dispose of all high carbon emitting assets in their portfolio, achieves very little in the real world by comparison.
This principle applies equally to social factors, whereby investors putting pressure on companies through stewardship with regards to their social responsibilities (e.g. paying the living wage) is much more effective at achieving real-world outcomes than divestment.
This, of course, raises an important question – if stewardship is so effective, then why are there not more investors doing it? Part of the reason for this is that the current stewardship code is voluntary. Catherine Howarth says she sees a role for moving the stewardship code to a mandatory basis and become part of financial regulation. She noted that the current voluntary code of practice for stewardship is overseen by the FRC, which lacks the teeth of a regulator like the FCA.
Sacha Sadan from the FCA noted that he is working much more closely with FRC on stewardship issues.
Read more about the Finance for Impact Summit discussions