What is wrong with the Investment Industry?

A recent post which appeared on both Social Edge and ClearlySo infuriated my friends and colleagues from the Socially Responsible Investment (SRI) sector.  I suggested that they might actually be responsible for stifling the growth of impact investment.  By vacuuming up most ethically-motivated investment and building portfolios of the same old big-cap listed stocks, they hardly assist the impact investment cause—despite their name, how “social” are they?  Dutch bank Robeco and Booz Allen estimated this pool will be EU5 trillion by 2015 worldwide, as the responsible investment sector continues to grow at twice the rate of the industry, illustrating investor preferences for more than just financial return.  Why is there a shortage of products which provide genuine social impact as well as financial returns?

Charities and foundations have billions in their coffers; endowments which fund their good works.  In the USA they are obliged to spend at least 5% per annum of these annually on their mission, of which “mission-related investment” is included.  Elsewhere there are no such restrictions and, with limited exceptions, the money is invested in all the conventional financial assets, in pursuit of return-maximisation (a crash or two notwithstanding).  This is absurd; name another sector where at most 5% of assets go to the organisations’ chief objective.  If this were the corporate sector, heads would have rolled long ago.

Pension funds are similarly “conservative”, or traditional.  Even those with sympathetic constituencies put themselves into a similar “straitjacket”.  They argue their fiduciary responsibilities give them no choice.  This is hogwash.  Many of the bolder and more genuinely responsive and responsible organisations (such as TIAA-CREF in the USA or the Esmee Fairbairn Foundation in the UK and others) find they can undertake steps to address this absurdity by allocating assets to impact investment—it is time for others to follow.

Not only is the conservatism of today’s trustees probably contrary to their beneficiaries’ desires (who would, in many cases, trade off some financial return for social impact, if the question were properly put) but really rankle staff, who also have social motivations.

Shall we require investment firms to survey staff regarding these tradeoffs, the same way mandatory surveys check risk tolerances?

Should Government mandate a minimum impact investment threshold, well above the current 5% level?

Should consumer-protection agencies require that investment products marketed as “ethical” or “responsible” or “social” meet certain minimum standards, in the same way we require say chocolate manufacturers use a certain amount of cocoa?

First published in The Social Edge in September 2009.

Converting the “Middlemen”

Normally I work hard to avoid gender-specific terms in articles, especially in titles.  But middlemen has a clear meaning—and we know what these middlemen do, don’t we?  Especially in financial services, particularly in the UK, they play a key role in distributing investment products to final investors, who might be either retail, institutional or High Net Worth.  Without converting them to ethical investment we will get nowhere.

Today a tragic circumstance exists.  Investors say they want responsible investment products, but they are way ahead of their advisors whose knowledge of this area is limited.  These middlemen, which include the IFAs, private banks, and other wealth managers, are lagging partly due to ignorance but also due to time.  The array of ethical products is still limited, confidence in them builds slowly and financial firms are loathe to stick their necks out.  It’s a shame this prudence has come so late—but that is a story for another day!

What is needed is a three pronged conversion assault.  First, we as a sector need to speak out on this issue and raise awareness.  If we make the argument in a positive way it will be most effective.  For example, when we talk about the growing desire of investors to invest ethically, we make the argument that firms which fail to offer such products will be missing out on a money-making opportunity.  I confidently predict that social investment (or whatever you wish to call it) will grow far faster than other investment worldwide.  Not everyone might agree with this but occupying this stronger ground, is preferable than lecturing people on what they “should” be doing.

The second prong involves government.  Existing mechanisms implicitly favour mainstream investment.  They simply choose to ignore the fact that many investors want BOTH a social and financial return, in favour of the arrogant presumption that returns maximisation is everything.  Many surveys prove this not to be the case.  We need to the government to require financial firms to run “ethical checks” on their clients in the same way they oblige firms to assess risk tolerance.  Ethical and social risk matter a great deal to investors—why are investors permitted to neglect these needs.

Finally, investors need to hassle their professional advisers.  If we ask, the products will come.  Coutts Bank is a case in point.  It was not too sure of its policy on social investment until its client base, especially those who have made their own money, demanded these products.  Now it is seeking to leap to the forefront.

With this three-pronged approach, and the growth of ethical players such as Investing for Good, ClearlySo (I am its CEO), Marmanie Consulting and a host of IFAs who are members of the Ethical Investment Association, I am certain we can achieve mass conversion.

First Published in Third Sector in September 2009.