We meet tomorrow (24th September) at the Mansion House, London, to discuss ‘Responsible Investment’ – the conviction that investment returns in the long term will be best secured by recognising the impact of environmental, social and governance factors on business performance.

 

The case for Responsible Business is set out in our recent global inquiry, Tomorrow’s Global Company: challenges and choices - we argue that successful global businesses must increasingly take a wider view which recognises the full set of interdependencies between business, society and the environment, and that business leaders can best do this by redefining success, living their values, and working with government and civil society to create the right enabling frameworks.

 

It will not perhaps come as a surprise to learn that we believe that the argument for responsible investment and for responsible business is mutually reinforcing - that deepening success in terms of products and services reinforces and better secures long-term returns from investing in such companies.

 

In the global inquiry we conclude that the purpose of tomorrow’s global company is:-

“To provide ever better goods and services in a way that is profitable, ethical and respects the environment, individuals and the communities in which it operates.”

We reach this conclusion committed to securing financial returns and commercial success, but convinced that the preconditions for achieving success have fundamentally changed.

A few weeks ago, even a few days ago perhaps, this argument was one that convinced many, but not all.

Now as deeply held convictions about the fundamentals of the way in which the global economy works have started to crumble around us, the question becomes what has this analysis of business and the ‘real economy’ got to tell us about the worlds of finance and investment.

In arguing for responsible investment, we have become sadly clear what irresponsible investment looks like – and what it costs.  As a wise friend recently remarked, it used to be that so called ‘externalities’ were a footnote on the financial accounts of business; now the financial system is becoming a footnote on nationalised debts, the price of which is being picked up by governments today, and taxpayers tomorrow.

And we might well conclude that a working definition of responsible investment is “to finance goods and services that are profitable, ethical and respect the environment, individuals and communities that it funds.”

In the global inquiry, we argue that companies depend for their success on the health of three connected systems - the natural environment, the social and political system and the global economy.   

This is just as true of financial institutions and instruments, but for many it seems that the world of money has become so divorced from the reality of ordinary mortals - wrapped in the beguiling sophistry of derivatives and other abstractions - that recent events are akin to some latter day biblical plague, the bonfire of our vanities made real.

For a ‘financial crisis for dummies’ read “The crisis made simple: how dodgy home loans in America led to collapsing banks, falling markets and the end of HBOS”

“The West is ditching its faith in free markets and private enterprise” wrote Anatole Kaletsky in the Times recently.  He went on to describe “the complete failure of the biggest, most dynamic, most innovative and competitive markets that have existed in the history of capitalism - the Wall Street stockmarket and the market for US bonds.”


Understanding ownership

In a few weeks time, we will be launching Tomorrow’s Owners – which will set out how to better understand what is happening with ownership, and the issues that arise in relation to different classes of investment, such as hedge funds, PE and Sovereign Wealth Funds.

In particular, we want to understand the impact of ownership for businesses that seek to address the agenda set out in the Tomorrow’s Global Company inquiry – from this analysis of ownership we will set out ways of better addressing the financial crisis that we are facing.


The way ahead – the need for ‘Tomorrow’s Company’ thinking

We are living not only in interesting times – but also dangerous times.  There is a great temptation for knee-jerk reactions, to take actions which deal with symptoms and not causes, to tackle a part of the problem in a way which ignores the big picture and leads to unintended consequences, to blame individuals without tackling and changing underlying behaviours.

There is certainly a need for strong and decisive leadership – and in this context, the actions in the USA must surely be recognised and applauded, putting in place a $700 billion rescue package to purge ‘toxic debts’ held by banks around the world.  (But in truth, no one can know whether even this is enough)

 

As has been remarked, worrying now about moral hazard now is like refusing to sell fire insurance just after the Great Fire of London - we must at least try to create a firebreak in the face of the fire storm.

 

The numbers are mind boggling, and the issues, literally, overwhelming.  I have heard that one estimate that there is $300 trillion in derivatives remaining  'unwound', to be worked through the system - greater, believe it or not, than the GDP of the planet.  No wonder then that so many recent conversations I have had have ended up with otherwise sane and intelligent folk shaking their heads, wondering how this has been 'allowed to happen'.

From the rubble, though, we need to move forwards and rebuild.  And we need clear thinking and analysis to inform decisions, which above all lead to new ways of behaving.  Over the next few weeks, we want to evolve a policy framework which, we think, should seek to address the following:

'What instruments and institutions with what governance, in the UK, Europe, USA and Globally, will be appropriate and fit for purpose to support investment and lending practices, which meet the needs of individuals (as employees, consumers and citizens) and of business as a force for good. What enabling frameworks will be required at a systems and sub-system level, and what will the role be of regulation to achieve this, and what form should it take. How will the necessary behaviours and values be established to ensure the success of these instruments and institutions in practice"

Do you agree that this is the right way to frame the policy debate?


Building blocks for policy

This debate section on forceforgood.com will host our evolving policy thinking, inviting others to contribute their ideas.  Elements of this thinking have already been represented in blogs that have been posted, and emphasise the importance of:

But so much remains unanswered.  In discussing ‘credit’, can we return to its former meaning of centuries ago, closer to the Latin credere (to believe or trust).   In this context, I was struck by this quote from Dr Muhammad Yunus: 

"I said: look at the world, how funny it is. They took the word credit which means trust, and built a whole edifice of credit institutions, refined, very sophisticated, entirely based on distrust." At Grameen, we went back to the original meaning of credit."

 

In setting out what is to be done, a three-fold approach is required:-

 

Firstly, for business and business leaders - as set out in our global inquiry, being responsible businesses, and increasingly, looking to the future, creating value through sustainability.

 

Secondly, for investors - subscribing to and follow the principles of responsible investment set out in the UN PRI, with so far $15 trillion under management by those who have 'signed up'.  It is important to recognise that as so many investors have focussed on the short-term, so others have concentrated on long-term returns.

Thirdly, for policy makers - these are some of the elements of the policy framework that might emerge, building on those already identified:

  

Will Hutton has already said it, but it is worth repeating:  “The choice is to condemn the new technology and force an economic crash as debt and credit regress to pre-securitisation levels.”  We need a financial system that works, but can’t pretend that somehow we can do without one, as recent coverage almost seems to imply.  The sheer complexity of the world of finance has almost led to a sense that this is all beyond the power of the human mind to comprehend, much less act on.  Such defeatism is dangerous and cannot be tolerated.

 

Anthony Hilton in the Evening Standard underlines the theme of this section:  "It is a pipe dream to think we could replace all the City jobs with extra manufacturing, especially in the face of the decline of North Sea oil." 


Building on the basic principles of the global inquiry

In developing this analysis of finance and investment, it is worth remembering the basic argument of the global inquiry.  In presentations I summarise the core underlying argument as follows:-

There remains huge power in these conclusions, and it is well worth keeping in mind both the critique of the market it offers but also the affirmation of what the market can achieve given the right enabling frameworks, in thinking through how the markets for finance should work.
 

 

 

This analysis is still largely framed using the tools and basis of understanding which mirrors that of the problems that it is describing.  This must raise the question of whether the solutions that might result are capable of the step change in thinking required to move the system from one state to another, capable of achieving a new equilibrium.

 

As others have argued, capital is often no longer scarce.  Knowledge and innovation are far more likely to shape business success.  What this means is that business need not always take current forms of organisational structure.  Stock market valuation may no longer be the most accurate indicator of business performance. 

 

We are perhaps moving to a post-capitalist form of business.

 

The performance metrics for business are ever more important.  We need, as we have argued, to redefine success, in a way that internalises externalities.  For now, the most promising ways of doing this are through the development of a range of performance indicators - most notably, through the Global Reporting Initiative, or GRI.

 

New, and complementary, developments in 'Green Accounting' are also evolving - most notably through the work of the Green Indian States Trust, or GIST.  The goal is to present "a framework of national accounts that presents genuine net additions to national wealth. This system of environmentally-adjusted national income accounts will measure the depletion of natural resources and the costs of pollution and will evaluate additions to the stock of human capital".

 

An important and developing application of this methodology is being developed through 'The Economics of Ecosystems and Biodiversity' - TEEB.  "The study will evaluate the costs of the loss of biodiversity and the associated decline in ecosystem services worldwide, and compare them with the costs of effective conservation and sustainable use."

 

This all matters of course, because if metrics combine non-financial and increasingly financial measures which consolidate this wider view, then a basis for taking responsible decisions can be established - for businesses, investors and policy makers alike.  

 

Such 'step change thinking' will take time to evolve, and for now we need to make best use of the tools we have, even as we fear that they may be more part of the problem than the solution.  But at least if we 'hold' this awareness in our mind, we will have a greater realism about what current tools can achieve, whilst shaping the energy and tension from which transformational thinking can emerge.

 

Join the debate on forceforgood.com

So we welcome you to the debate – recognising the importance of responsible investment in guiding decisions of finance and money, rejecting the short-term and individualistic agendas which have guided the irresponsibility that has got us into this mess.

 

 

To see more debate, resources and information relating to the global financial crisis use the links below: