Penny Shepherd welcomes the Kay review into how the markets can restore sustainable long-term growth
Today, Friday November 18, sees the closure of the consultation period for the Kay review. Leading economist Prof John Kay has been asked to recommend to the UK government how the power of trillions of pounds of investment in UK equities can better enable quoted companies to achieve long-term success in a changing world.
It may seem like a dry subject but, in reality, it is one of the most farsighted initiatives around to restore legitimacy to the Square Mile. Kay’s mission is to return equity markets to their proper role as the most effective way to allocate capital for long-term wealth creation.
This is urgently needed by companies, savers and society as a whole. So Kay has a big job on his hands.
His recommendations are unlikely to focus on one single actor. Significant change will only come about if all elements of the investment chain – asset owners, investment managers, companies and consumers – play their part in embracing a more long-term approach. That means each element improving its capacity, transparency and incentive systems.
Wealth creators
All parts of the chain must respond, but perhaps the most sensible place to start is with the creators of wealth, the companies themselves.
Business strategies and information drive markets. If companies themselves do not assess and report on how they will address the environmental, social and governance (ESG) risks and opportunities facing their business in the coming years together with key metrics and data, we cannot expect the market to respond.
That alone makes companies probably the most significant link when it comes to improving the behaviour of the investment chain.
But there is another reason that companies are a good place to start. As-well as being users of capital, companies also have one of the strongest influences on providers of capital through their support for corporate pension funds and workplace savings schemes.
With auto-enrolment into workplace pensions becoming a hot issue from 2012, and many UK companies large and small increasingly recognising the importance of sustainability in their business strategy, now is the ideal time for companies to use their influence to encourage and assist these pension funds and savings vehicles to demand long-term responsible investment approaches.
Public support
Recent YouGov research for UKSIF has found that this has public support. Nearly three in five British adults surveyed in September thought that employers’ pension schemes should match or beat the standard set by the new NEST (National Employment Savings Trust) workplace pension scheme in their approach to managing sustainability issues.
There is some way to go to achieve this. Earlier this year, UKSIF surveyed the UK corporate pension funds of companies in the FTSE4Good Series and the Carbon Disclosure Leadership Index.
The results did indicate a step change in how corporate pension funds were responding to the case for responsible investment, with some impressive examples of excellent practice. Equally positively, it demonstrated that pension funds that started on the responsible investment journey tended to deepen their practices over time.
Nevertheless, it found that a very large number of UK corporate pension funds are lagging behind the leading schemes in their approach to responsible ownership and investment.
Look long-term
That is why, as part of our submission to the Kay Review, UKSIF has called for those companies with a stated commitment to corporate responsibility to encourage and assist their corporate pension scheme to become a long-term responsible investor.
Of course, public procurement is also key. Long-term responsible investment approaches should be required of invested public pension funds, such as those providing pensions for local government workers and members of parliament.
These asset owners in the chain must accept the challenge. Pension funds, insurance companies, sovereign wealth funds and private savers must drive change by incentivising their investment managers to act in a long-term responsible way.
Today, investment consultants have an increasing range of skills to assist. Major asset owners, particularly those with beneficiaries, should also disclose publicly their responsible investment policies and how those policies are implemented.
After asset owners in the investment chain, it is the investment managers that usually do the day-to-day business of investment, and they must also pick up the baton. The challenge of deciding exactly how long-term issues should affect an investment decision – for example, quantifying the effect a company’s high carbon emissions might have on its share price over the long term – is difficult. And it is the investment managers that are the organisations most likely to develop the expertise and capacity to integrate these issues into the investment process. Senior executives there must take the lead.
Transparent approach
Our submission to the Kay review highlights that asset owner demand should drive greater expertise and improved investment models. Nevertheless, managers need to reform incentives and become more transparent about both their investment approaches and issues such as conflicts of interests if the investment chain is to operate effectively for the long-term.
Finally, some responsibility also lies with the British public themselves. They make up the customers of the companies, the pension fund members that asset owners must report to and the savers who provide capital for investment.
The public can encourage the whole chain to act by demanding to know from their trustees or financial advisers whether investment decisions benefit society and how the responsibilities of ownership are exercised on their behalf. Financial education in schools and the workplace needs to support them by deepening understanding of equity markets as long-term allocators of capital.
No one has all the answers but acting together we can make great strides towards a UK economy that is more focused on the long-term. That is why we warmly welcome John Kay’s review.
Penny Shepherd MBE is chief executive of UKSIF, the UK sustainable investment and finance association. She is a member of Ethical Corporation’s editorial advisory panel.