The financial system is inextricably linked to the survival of our global societies. But we know all too well from recent experience that too much emphasis on short-term gain at any cost – coupled with a lack of accountability – can bring the system to its knees, as we saw during the 2008 global financial crisis.
The economic downturn prompted many institutional investors to seek a new investment model, one that looks not only at financials, but also at the way companies are operated and governed.
Retail investors, too, are becoming more exacting about how they invest their money.
Last year, a survey conducted by Boston Consulting Group found that of the $71.4trn (£56trn) of assets under management globally at the end of 2015, 40 per cent were retail, and this segment has been growing relative to the institutional segment.
Retail interest in sustainable investment is increasing: the global sustainable investment market is estimated to have grown to $22.9trn at the start of 2016, up 25 per cent from 2014, while the share of retail assets in total sustainable investment in Canada, Europe and the United States is estimated to have increased from 13 per cent to 26 per cent in the same period.
Principles for Responsible Investment (PRI) is now undertaking work to try to create a more sustainable financial system. A financial system aligned with sustainable, equitable economies can both reward individuals as investors and as members of society.
This work is timely. We are about to see a momentous wealth transfer to the millennial generation who will live longer than any before and, given the rise of compulsory pension savings, will have more control of these assets than any previous generation. Importantly, this generation is showing every sign of valuing responsibility and sustainability as highly as investment returns.
Realising we cannot realign every sector of the financial system, we looked at four areas where investors have influence: the delegated investment chain; the relationship between investors and companies; market structures and functions; and (to some extent) economic externalities. We know from our research and the work of others that potential risks and system failures exist across these areas. This long-term project has several phases of implementation.
Phase I has begun with four projects, the first of which aims to influence the dialogue taking place in investors’ boards by targeting 200 asset owner boards who are good at environmental, social and governance integration, but need help following through in practice.
The second project focuses on asset allocation and portfolio management advice, to ensure it is consistent with sustainable system outcomes.
The third project examines macroeconomic risk, examining the relationship between social issues such as economic inequality and factors such as low levels of economic growth, productivity and technological change.
Without attention to the consequences these issues, investors may fail not only to generate financial returns, but see their capital invested in business models that undermine environmental resources and contribute to even greater levels of economic inequality.
Finally, these Phase I projects will be underpinned by dialogue between investors and experts on identifying the desirable outcomes from financial system activity on the environment, communities, workers and, of course, savers.
