Labour’s legally-binding financial returns would wreck sustainable investment

Labour leader Ed Miliband has threatened to break up big banks and cap pension charges at his party’s annual conference, but it’s his stance on imposing a legally-binding return threshold on financial services firms that will significantly worry ethical investors.

Miliband’s proposals would mean that pension funds and banks would be breaking the law if they didn’t maximise a saver’s return – a policy which if implemented, could threaten sustainable investment practices in the UK which take a more balanced view.

Taken to an extreme, portfolios that include high return companies responsible for child labour, environmental degradation and resource scarcity would be at a legal requirement to provide investors with the best returns.

“Millions of working people are doing the right thing and putting money aside”, he said in Manchester over the weekend.

“The least they expect is for it to be there for them when they retire.

“But too often people are finding there is much less in the pot than they expected.”

The solution to this, though, is not to impose a legal return threshold, but instead to educate investors on investing in more stable and sustainable companies.

Investment in companies and pension funds within thriving sectors – cleantech, energy efficiency and water, for example – would ensure more sustainable returns than sectors like tobacco, the arms trade and alcohol, with their high external costs to people and the planet.

That said, a popular misconception is that dedicated sustainable investments reap poorer returns than their mainstream counterparts, but a number of studies – most recently from Osmosis Investment Management – have shown that this belief is simply not true.

Labour’s proposed policy might sound like it is on the table for the benefit of the public, but legislating against making moral decisions in favour of more speculative, less sustainable returns – would be a foolish way to go.

Miliband’s proposal comes after a revision of the UK Stewardship Code, a set of voluntary guidelines that aim to increase corporate governance and boost investor-company engagement, which now has an increased emphasis on pension funds and other asset owners.

“Now is the time for all pension funds to demand that their managers protect the value of their investments by adherence to the code”, said UKSIF chief executive Penny Shepherd, welcoming the modification.

“In addition, all sponsoring employers should ask their pension fund to demand effective stewardship before they complain about City short-termism.

“With auto-enrolment starting in October, no responsible employer should place their employees’ long-term savings with a fund manager who is not committed to being a good steward.”

Further reading:

FairPensions to host training event for responsible investment lobbying

Investing ethically is a process with ‘intrinsic benefits’

Investments in resource-efficient firms shown to outperform competition

Talk of high returns amongst ethical investors detracts from the point

The Guide to Sustainable Investment