Working towards sustainable capitalism
William Andrews Tipper, head of sustainable business at Green Alliance, gives his response to an event on sustainable capitalism held recently by the St Paul’s Institute with Al Gore. This post first appeared on the St Paul’s Institute website.
In recent years capitalism has fallen into disrepute. The excesses that were carried out in its name have led to questions as to whether this is a project with a future. This is too strong: surgery is undoubtedly needed, but the patient will survive. The task we are faced with is to ensure these interventions accelerate the development of the sustainable capitalism model developed by Al Gore and his colleagues at Generation Investment Management.
During his speech Mr Gore set out a compelling vision of capitalism’s future, built on a coruscating critique of its recent past. Less positively, he also outlined how few people currently see that it would be in their interests to make this vision happen, and how little time we have to change their minds.
Follow the money
What has got us to this point of crisis, and what can we do about it? The answer to both questions is ‘follow the money’. The owner and allocators of capital have traditionally provided investment to underpin growth of companies in the real economy. But, in recent years, this sector embraced a different model based on the speculative trading of poorly understood and ultimately toxic financial products. And now, scarred by the fall-out from the ensuing financial crisis, financiers are rushing to ‘safe havens’ such as gold or fossil fuel extraction, while monies for investing in our infrastructure and SMEs dry up. In the short term, this will do nothing to get flat lining economies back on their feet. In the long term, the results of this rapidly inflating carbon bubble will be little short of disastrous.
This philosophy has not delivered for investors, and the consequences for the real economy have been dire. Mr Gore highlighted two in particular: price volatility and supply instability for a whole range of commodities, driven by massive speculative trade in financial derivatives, as well as hyper-inequality within societies, with the gap between rich and poor getting ever wider. As a recent UNCTAD report demonstrates, income equality not only brings social benefits but helps drive higher long term economic performance. Thus, a narrow focus on growth, based on the highly limited measure of GDP, is as bad for economies as it is for people.
Short term vs long term
So what is driving this behaviour? Ultimately, investors make these decisions because the system we have set up encourages them to. Mr Gore set out a number of inter-related factors, some of which bear repeating here. The growth of short termism, with decisions driven by quarterly reporting and executive incentives designed accordingly. This approach privileges cost-cutting ‘efficiency gains’ and profit maximisation over investment that creates value over the long term. The prevailing narrow perception of ‘value’ is also problematic, with everything that lies outside that view – such as unsustainable resource depletion or unethical labour practices – being discounted or excluded entirely. This is coupled with a correspondingly narrow view of ‘values’, with short term financial returns taking precedent over any other consideration.
Carrots and sticks will be needed to break these destructive patterns of investing. Focusing on carrots, designing incentives to which individual asset managers will respond is a necessary first step. In this respect aligning personal bonus payments with long term investment performance, as Generation Investment Management has done, is an idea whose merits are blindingly obvious.
However in many instances investment institutions are not investing their own money. What carrots can we offer to the ultimate owners of that capital to make them activists in the transition to sustainable capitalism?
Put tax subsidy to work
Here is one idea. With the introduction of auto-enrolment on 1 October 2012, increasing numbers of UK workers will be investing in financial products to generate their retirement income. This money will be invested on their behalf by financial institutions, who thereby generate profits for themselves as well as a return for savers. Currently tax relief is granted to all pension contributions, which already serves to effectively subsidise – to the tune of billions of pounds – the returns made by investment institutions.
This subsidy should be put to work for the cause of sustainable capitalism. Requiring investments from savings to meet certain sustainability criteria to qualify for tax relief would at a stroke change the terms of the game.This would create strong drivers for development of a new range of products that price-in everything that is currently priced-out, and take a long-term approach to returns on investment. Savers would clamour for their money to be invested sustainably in order to be eligible for tax relief, while investors would be motivated to meet this demand.
Delivering good returns
Defining what constitutes a sustainable investment would, of course, not be straightforward. However, there is a compelling financial, as well as moral, case for doing so. Generation Investment Management and others are already demonstrating that investing on the basis of a company’s fundamental value – rather than betting on short term changes in the market – delivers good returns. As the long term impacts of the carbon bubble become apparent, the value of these investments can only increase, delivering bigger pension pots for savers.
This would also help meet a profound need in the real economy. The UK faces a massive investment shortfall in the infrastructure that will underpin long term economic growth. Pension funds, with their long term investment horizons, are perfectly-placed to be partners in this process. The Treasury is targeting £2 billion from UK pension funds for this very purpose through the Pension Infrastructure Platform. Ensuring that pension investments into green infrastructure benefit from tax relief would turbo-charge flows of money into the UK’s long term low carbon economic potential.
Making UK savings the engine for UK prosperity is not a new idea but one that seems to have fallen into neglect. Capitalism has been bloodied by the events of the past five years, but by incentivising more sustainable patterns of investing we can look forward with optimism to the future.
A summary report of the event can be downloaded here.
Saving for a sustainable future, by Chris Hewett, Green Alliance 2012