It’s National Ethical Investment Week (NEIW) – a great initiative to raise awareness about green and ethical investment among the financial community and public at large. But this year, awareness-raising needs to stretch to another important section of society: policymakers.
It’s remarkable that last month’s party conference season in the UK came and went with barely a mention of responsible or ethical investment. Given the potential that responsible investment has to shape the future of the UK and the world, and to influence the way companies behave, that seems like a big oversight.
To paraphrase Charles de Gaulle, “Policymaking is too serious a matter to be left to the policymakers.” So to start the ball rolling, here are three ideas for policymakers this NEIW.
1. A ‘Stern report’ for stranded assets
Seven years ago this month, the government-backed report by the economist Lord Stern became the most significant attempt to put an economic cost on the effect of global warming.
The Stern report provided a financial justification for action on climate change and catalysed action by investors, companies and the public sector. Much research has built on this, most recently from the Carbon Tracker Initiative, which showed that 80% of the fossil fuel reserves that investors currently treat as assets are ‘stranded’ and need to be drastically revalued.
However, carbon is only one of several ‘stranded assets’. If we accept that companies will at some point have to pay a reasonable price for the natural services they currently take for granted – services such as freshwater provision or biodiversity – then investors, companies and the public sector need to understand the likely economic impacts so that they can act.
Research funded and supported by the government on how bringing such ‘externalities’ onto the balance sheet would affect the global economy could have a similar impact as Stern had.
2. Investment in financial education, with new rights to information
Much of the money circulating around the financial system is owned by ordinary members of the public, through their ISAs, pensions and other savings. This makes them part-owners of the businesses they invest in, and gives them the power to change corporate behaviour.
But people rarely have the information and knowledge they need to use their power. Improved education in schools and colleges and by investors themselves can change that.
Leading responsible investors such as the Environment Agency Pension Fund report back to their members on how they are being responsible with their money, while others such as NEST have conducted comprehensive research on the “characteristics, circumstances and attitudes” of their members and then shaped policies accordingly.
Policymakers should incentivise more investors to follow these trailblazers with investment in financial education and new rights to information so that anyone with an ISA or a pension can understand and influence how their money is being managed.
3. Rethinking listing rules
Information drives markets. If the information investors receive is shallow and short-term, then investors decisions are likely to be, too. So if a company is not obliged to report on how it is managing sustainability, then assume that the market won’t price in the sustainability of that entity.
While there are numerous ways to improve corporate sustainability reporting, the one that would have the biggest and most immediate impact would be for major stock exchanges – such as London Stock Exchange – to introduce sustainability reporting as a listing requirement.
Stock exchanges play a unique role in capital markets, one which positions them to be critical levers for improving the depth, consistency and comparability of corporate disclosure on climate change and sustainability performance.
It is standard practice for businesses to issue thorough financial reports, so why not sustainability reports?