Two professors at HEC Paris call for citizens to demand investment policies from their banks, pension funds and other financial players that contribute to building a more just and sustainable society.
When UK Chancellor George Osborne announced this week that any ‘pension pot’ savings left after a person dies would no longer be taxed at 55% the obvious question was: Why have people not demanded this before? The reason is that too many people just do not understand pensions (or the tax system) enough to complain. Nor sadly do they understand the financial service sector or where or how their money is invested.
While people are increasingly aware of their social and environmental responsibilities and millions of families make the effort to recycle, buy fair-trade products, and donate to or work for charities, they are missing the key point say professors Diane-Laure Arjaliès and Afshin Mehrpouya. They need to be aware that the most effective lever at their disposal if they want to change society is their money.
To ensure their money finances the society they want and the world they want to leave to their children, individuals should ask their financial service providers for greater transparency as to how they invest their money. They should exercise their right to demand that these investments take into account the social and environmental issues that concern them – be it climate change, ethical sourcing, or human rights.
Back to George Osborne – his new announcement follows another significant policy change. From April 2015 UK pensioners will no longer be forced to buy annuities but will be free to invest their pension funds wherever they wish. Some will buy a Lamborghini, but most will start taking a far greater interest than ever before in where their pension savings are invested. Although it may be true that one individual has little chance of convincing their bank to change its investment policy, if millions of savers, pensioners, and insurance customers started to demand socially responsible investment, change would happen.
Socially Responsible Investment (SRI) is growing. Asset managers and social rating agencies are promoting a more sustainable approach to investment, while governments are demanding enhanced transparency. However at a time when the typical US CEO is in post for no more than 4 years and asset managers are mostly rewarded for fast returns, long-term SRI can be seen as a luxury. The search for short-term financial performance as well as the complexity and cost of analysing environmental and social aspects of investments – often qualitative when financial tools are largely quantitative – are major obstacles to the growth of SRI. So much so that the majority of large institutional investors and pension funds too rarely take account of environmental and social issues in their strategies.
Individual financial service customers hold over 70% of the assets under management in the international financial markets, and, when asked, they are concerned about the social and environmental impact of their investments. In a 2013 EIRIS-FIR survey in France, for example, 77% of retail investors responded that more stringent environmental, social and governance requirements in investments are essential. What is more, research suggests that attention to environmental and social factors in investments, can lead to higher long-term returns for financial organizations, and better yields for their individual customers.
In the boom years before the 2008 financial crisis, it was perhaps understandable that people treated financial markets as a world apart, too technical to comprehend and disconnected from their daily lives. Today, when we are only too aware that financial markets have a big impact on the real world, we need to extend this awareness to fully appreciate that the money they manage is ours, and the power that goes with it should be ours too.
Watch the video: Who owns the money? A movie on SRI - HEC Ideas #2
About Professor Diane-Laure Arjaliès
About Professor Afshin Mehrpouya