A week on Sunday, the world marks five years since the collapse of Lehman Brothers, the spark for the worst global downturn since the Great Depression.
Most of us will remember the scenes of Lehman workers leaving Canary Wharf clutching hastily packed cardboard boxes, swiftly followed by trillion of pounds of public money leaving government accounts to bailout the likes of RBS, HBOS, AIG and Fortis. We’ll also remember the determination of many to ensure that such a crisis never happens again.
The recent story that saw the Archbishop of Canterbury “embarrassed” to discover that the Church of England invested indirectly in online lender Wonga – even though he’d previously said the Church would try to force the firm out of business – suggests that in the important area of transparency responsible investors have a long way to go to avoid a future crisis.
Do you know what you invest in?
I remember speaking to the trustees of several large global pension funds around the time of the Lehman collapse, and the overriding emotion was one of shock and surprise. In private, the main concern was alarm that despite all their due diligence and long meetings with asset managers, hardly any of them knew how much their portfolios were exposed to sub-prime loans, unethically sold to NINJAs i.e. those with no income, no jobs or assets (not the martial arts experts).
The complexity of the market – which repackaged these dodgy loans as asset-backed securities and then wrapped them in shiny collateralized debt obligations or similar and, got them highly rated before selling on to investors – destroyed the value of many of our pension pots and ISAs and has left our governments with a debt mountain to climb.
At the time, the responsible investment community recognised that we need much greater levels of transparency if we are to avoid another financial crisis and publicly called for action.
There’s no doubt that we’ve seen these calls heeded to at least a small extent in the last five years. In the UK and elsewhere we’ve seen the creation and wide adoption of Stewardship Codes that encourage more understanding and engagement between investors and the entities they invest in, and we’ve seen a massive growth in ESG research which can help investors spot risks such as sub-prime loans.
There’s been the government’s ‘Kay Review’, which highlighted the issue of too many intermediaries in the market, and we’ve seen massive, mainstream adoption of the UN Principles for Responsible Investment which this year will make it compulsory for all its signatories to publicly report on their responsible investment activity.
But the parable of the Archbishop shows that transparency is still a problem.
Even with the excellent team that is in place to ensure that the Church of England’s investment bodies fulfill their ethical criteria (including substantively avoiding firms involved in payday lending), their investment chain was still long and complex enough to go via a pooled investment vehicle and a US venture capitalist and hide the end investment – Wonga.
There is also wide public support for more transparency. A YouGov survey in March this year found that 47% of British people with savings or investments wanted their investment managers to be more transparent.
The desire for simpler, more transparent investment markets is still unrequited half a decade after Lehman’s collapse.
Elliot Frankal is Director of ESG Communications, a PR firm specialising in responsible investment for retail and institutional investors.